Media release: Make investment in mining more attractive to avoid job losses – not beneficiation

“There are two reasons for job losses in any sector: firstly, a decline in the sector and secondly, rising productivity,” said Free Market Foundation (FMF) executive director Leon Louw at a hearing convened on 08 July in Pretoria by the Minerals Board to investigate job losses in the mining industry. The FMF had been invited to give oral and written evidence. Louw said that a sector may decline for various reasons, most of which cannot and should not be avoided by policy interventions. For example, when ox wagons were replaced by superior forms of transport the ox wagon industry declined and 100% of jobs rightly disappeared. Louw rejected the idea of beneficiation as dangerous and nonsensical and suggested that the only way to avoid job losses in the sector is to make investment in mining attractive. This can be done by liberalising labour law, lowering taxes, removing threats of nationalisation, and reforming mining laws so as to replace discretionary power with objective criteria and long-term certainty that the “rules of the game” will not be continuously revised.

In mining, the decline in jobs could be because of resource depletion, he said, giving the example that the UK government wasted absurd sums of money trying to prevent the decline of its coal mining industry when rich deposits had been exhausted.

Counter productive government policies, which may cause sectoral or “structural” decline can be avoided. Examples in South Africa are the excessive cost raising impacts of energy policy, transport policy, labour policy and mining regulation.

The catastrophic failure to implement electricity reforms in terms of the energy White Paper and the National Development Plan has meant that one of the highest costs of mining has risen excessively making marginal mines unviable.

The failure of South African railways to transport mining equipment and output efficiently forces mines to use costly road transportation and imposes billions of rands of damage on South Africa’s road infrastructure.

The nationalisation of mineral rights confiscated a substantial proportion of mining company assets worth tens of billions of rands. This deprived mines of capital with which to invest and create or sustain jobs. Labour policy has raised the cost of mining significantly thereby also causing marginal mines and jobs to be lost.

During evidence Louw was asked about the ethics of mining companies not wanting to pay “decent” wages and having exorbitant CEO remuneration. “Just as workers do not work for any reason other than income, investors do not invest for any reason other than profit. Their motives and morals are irrelevant”. Regarding CEO pay, he said that if South Africa wanted the world’s best CEOs to run our mines thereby ensuring we have the world’s best mining sector, creating the most jobs, we should offer to pay more not less.

Regarding mining regulations, he handed the committee a copy of the legislation in which discretionary powers are highlighted. Virtually every provision entails arbitrary discretion by officialdom, which creates so much uncertainty and unpredictability in investment decisions. Even if regulations are bad, investors can cope if there is stability and certainty.

Louw said that there is policy schizophrenia towards productivity improvements and job losses. On one hand government wants higher productivity. In the mining sector that means greater tonnages processed per worker or similar which mining has achieved with output per worker rising hundreds of percent during recent decades. This is not because of better management or harder work. On the contrary, workers work fewer hours under improved conditions. Spectacular productivity gains are due to technology improvements or “capital-labour substitution”. Machines have replaced people – higher productivity means more output per person and less employment.

Conversely, more jobs can be achieved by lowering the cost of labour though less favourable employment conditions and wages. He cited the example of an American engineer who, on a visit to China, encountered a crew of men building a dam with picks and shovels. Pointing out that using earth-moving equipment, would take less time, the response was that using equipment would destroy jobs. “If job creation rather than dam building is your goal,” suggested the economist, “why not employ additional men and let them dig with spoons?”

Louw said that one of the most dangerous and nonsensical ideas is that “beneficiation” can create jobs in the mining sector. The first part of this myth is that beneficiation is neither mining nor in the mining sector. There is no rational reason for believing that it is economically sensible to process minerals simply because they happen to be in a country. If you are efficient at processing copper then you should do so regardless of where copper is mined. As governor of the reserve bank Lesetja Kganyago said, all raw materials are available to all manufacturers in countries at precisely the same price everywhere and where a particular material is produced is completely irrelevant.

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