Deloitte SA Blog

by Dr Jacek Guzek, Director at Deloitte Consulting

For more information or a detaled discussion on the subject, contact Abrie Olivier (Mining Industry Leader) at aolivier@deloitte.co.za  or +27 (0)82 874 6040 and Jacek Guzek (Associate Director) at jguzek@deloitte.co.za or +27 (0)82 940 6896.

Who actually benefits from mining?

Although the tide of resource nationalism has risen globally, with countries from Africa to Australia, Brazil, Canada, Chile and India considering options to increase state interventions in the mining sector, nowhere is the debate as high-profile, emotionally charged, divisive and potentially damaging as in South Africa.

The country is admittedly sitting on a mineral treasure trove second to none: 52 commodities reside under its surface, including the world’s largest reserves of platinum, manganese, chrome, vanadium and gold, and major reserves of coal, iron ore, zirconium and titanium minerals – all at an estimated in-situ value of $2,5 trillion¹. It is evident that the South African mining and minerals sector has immense value generation potential.

But in spite of its mineral (and other) riches, the country has been criticised for being seemingly slow in addressing what Mineral Resources Minister, Susan Shabangu, called South Africa’s “evil triplets”, namely: poverty, inequality and unemployment. Against this context, the proponents of a radical state intervention into the South African mining industry assert that the mineral wealth of the country ends up in the pockets of “monopoly capital” rather than benefiting its population at large. Who actually benefits from mining, they ask, and is it at the expense of those who truly should be benefitting? Let’s examine the question simply from the high-level value creation (or destruction) point of view.

Each (not only) mining opportunity has an inherent, or “in-situ”, value, which could eventually end up in the pockets of enterprising investors, if not for various concessions necessary to convert it into a commercial value all along the life-cycle of the project. These concessions, at a very high level, could include: R&D capital, investment capital, operating costs (including salaries of employees and procurement from suppliers), time value of money, royalties and taxes, etc. (refer to figure 1 below).

In the end, only a small residual portion of the inherent value of an opportunity finds its way to original private shareholders. In our experience, there are many successful mining projects where this residual value is only a lower single-digit percentage of the primary in-situ value. The remainder, in fact the lion share of the inherent value of any commercial opportunity, ends up in the economy at large, either through state treasury or through private sector spending, where it benefits all and translates into wealth and jobs.

Citigroup Global Markets² estimates that “only 7% of the value generated by SA miners gets distributed to shareholders i.e. the entrepreneur and risk taker. The biggest beneficiaries are in fact suppliers to the industry, mining sector employees and the government. To turn opportunity into this value (and many fail along the way) requires substantial upfront investment capital and specialised and scarce skills.

Figure 1: In-situ value graph

The question remains, why would government want to assume full risk of a complex entrepreneurial activity for such an incremental value, given the significant investment requirement?

In spite of some notable exceptions, governments’ track record in managing commercial entities the world over is, at best, inconsistent³. One can therefore question what value will ultimately accrue to society by replacing the role of the entrepreneur with a government institution. Transferring ownership from private shareholders to the state, to ensure “fair” distribution of generated value, creates a different set of incentives for public sector entities, potentially resulting in consequences contradictory to the primary intentions. While maximising shareholder value is what drives the management of private companies, the definition of objectives for a state principal is a lot more complex and politically charged. Alternatives such as financial sustainability, job creation, fair distribution, or community development often require trade-offs between efficiency and policy imperatives, blurring the overall mandate. In addition, performance of managers in the public sector companies is not always subject to the same level of scrutiny as is standard in the private sector. Furthermore, public firms do not face take-overs or bankruptcy, with all their threatening but performance-enforcing consequences.

On the other hand, for a relatively small reward or incentive, private investors shoulder the entire burden of risk in developing and managing complex opportunities. They are also usually willing to wait for returns throughout volatile economic and commodity
cycles. But any entrepreneur has to be assured that this risk is worth taking, considering the alternatives to deploy their capital in the most productive manner, and the security of tenure is the very basic consideration.

It therefore appears that the intensity and profile of the debate on nationalising the mining industry in South Africa is far out of proportion with respect to the actual value that its resolution is capable of generating or redistributing.

Rhodes University economists, Gavin Keeton and Greg White, estimated in 20104 that had the nationalization of the South African mining industry been carried out then, the bill to the government would be around R850bn (i.e. the market value of listed SA mines).

If the government were to borrow this sum at the current interest rates, annual interest payments would amount to R72bn, almost 8% of total state spending. Even if state ownership had been limited to 51% and nationalisation without compensation was considered, the interest payments would still be close to R20bn, as foreign owners of SA mining assets would have to be compensated based on international and

bilateral investment treaties. In return, the government would gain some R20bn of extra after-tax profits of nationalised companies belonging to the state. Claims that nationalisation will enhance the state’s “fiscal capacity” are therefore false.

“It therefore appears that the intensity and profile of the debate on nationalising the mining industry in South Africa is far out of proportion with respect to the actual value that its resolution is capable of generating or redistributing”

Historically, metals and mineral resources seem to have been the favourite nationalisation targets – especially at the peak of commodity cycles when windfall profits have been evident. Only the banking sector can be said to have been targeted for nationalisation with similar resolve. What is conveniently forgotten is that the global mining industry goes through alternating cycles of poor- and super-profitability, and a steady stream of positive free cash flows is not guaranteed.

The South African mining industry, although neither the biggest contributor to domestic product nor the largest employer, cannot be underestimated in terms of its importance to national economy or, indeed, to national identity. It is only natural that a society with the South African level of inequality, debates the best use of its resources. However, the focus of such a debate should rather
shift from re-distribution of relatively insignificant residual value to identifying and removing impediments to growth of the mining industry, which has the potential to generate far greater wealth than is presently the case. More so, considering that efficiency, diversity, and the competitiveness of the mining sector are not questionable.

In the words of the State President, Jacob Zuma: “The state prepares the environment for economic growth and provides support to the private sector by providing enablers and removing obstacles” (a speech prepared for delivery at the World Economic Forum in Davos, Switzerland, January 2012). In such an environment both the state and the private mining sector have at their disposal multiple instruments and tools to optimize components of the industry value graph, which can forward the developmental agenda of the government as well as accommodate just rewards for entrepreneurial risk. Exactly who benefits from mining is as important a question as who would lose on its nationalisation.

For more information, please contact Abrie Olivier (Mining Industry Leader) at aolivier@deloitte.co.za  or +27 (0)82 874 6040 and Jacek Guzek (Associate Director) at jguzek@deloitte.co.za or +27 (0)82 940 6896

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1. Chamber of Mines, Facts & Figures 2010

2. Nationalisation – killing the goose that lays golden eggs, 29 June 2011

3.“The return of state-owned enterprise: should we be afraid?”, A. Musacchio and F Flores-Macias, Harvard International Review, 31/07/2009

4. Nationalising the mines will be an expensive business, Business Day, 20/09/2010

Deloitte South Africa takes a look at the financial, figures and industries that contribute to both government’s revenue, and expenditure. Taken from the audited 2009/10 results from Treasury, the infographic assists in showing insights into a highly complex set of numbers.

Download the full infographic here: Annual Budget Infographic

Follow @DeloitteSA on Twitter for more on the 2012 SA budget and use the #sabudget hashtag to contribute to the conversation.

This article, authored by Duane Newman (lead director for Deloitte Tax Management Consulting), explains how  the R25 billion allocated by National Treasury will be used to support growth in South Africa. You may contact Duane at dnewman@deloitte.co.za

Click Here to access the original article published on MoneyWeb

Grants and incentives will be a national focus over the next six years

The Medium Term Budget Policy Statement (MTBPS) issued by Finance Minister Pravin Gordhan on 25 October 2011 announced that the Medium-Term Expenditure Framework (MTEF) will introduce an economic support package to encourage improvements in competitiveness and promote structural change within the South African economy.

Following the contraction of capital expenditure during the 2009 recession, private capital investment has started to revive, expanding at an annual rate of 4% during the second quarter of 2011. The growth is largely attributable to purchases of machinery and transport equipment. Despite the capital investment recovery, real investment during the second quarter of 2011, remained 8% below pre-recession peak levels.

In response to the slowdown in the global economy South African’s fiscal and monetary policy remains supportive of growth. The employment gains and poverty reduction that government aspires to achieve require structural reforms to set the economy on a different growth path that increases labour absorption, improves international competitiveness, ensures a more equitable distribution of wealth and a transition to a green economy.

To achieve these goals government will make R25 billion available over the next six years through various grants and incentives to assist enterprises, boost industrial development and accelerate job creation. 

The primary focus of the R25 billion grants and incentives fund is to facilitate investment that attracts employment intensive industry and services to South Africa.  The incentives will build on the current incentives on offer for industrial investment, technology and training. Current incentives have not achieved the jobs creation estimates as initially planned. In many instance less job opportunities have been created. Also the incentives have not been widely accessed. Incentives for IDZs will be improved. At the moment there are no real incentives for investing in an IDZ.  The goal is to develop the IDZs into competitive logistics hubs participating in global supply chains and entrenching South Africa as a crucial gateway for trade into Africa.   Also very important is the alignment of trade, investment and energy policies to support the transition to a green economy.  Policy coherence in this instance is required to successfully transition to a green economy. 

Government acknowledges that investment in economic infrastructure has to coincide with a more competitive labour market that supports higher economic growth.  Transforming the South African labour market can only be achieved through adequate job creation, training and community works projects. These objectives are being pursued by means of the recently launched Jobs Fund administrated by the Development Bank of Southern Africa. The Jobs Fund was established at the beginning of the year with a value of R9 billion. So far only R352 million has been spend. A far more effective administrative system is required going forward to assist with job creation. 

The transition of South African economy to a green economy can only be achieved through major investments in renewable energy by the private sector. To facilitate the required investment the Industrial Development Corporation and the Development Bank of Southern Africa will have a specific focus on funding green projects.

The Department of Energy has moved away from a capital subsidy systems. It will rather provide appropriate feed in tariffs.  Other initiatives include reducing carbon emissions through government’s integrated resource plan, the proposed carbon tax and the introduction of a dedicated fund for green economy initiatives. 

Grants and incentives will be a national focus over the next six years as government attempts to achieve the country’s economic goals through incentivising investment that correlates with these objectives.

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This article, written by Helen Bimbassis and Anneke Andrews of Deloitte RecruitTalent, discusses the skills gap in Africa and ways to address this problem.  You can  contact Helen Bimbassis at hbimbassis@deloitte.co.za or  Anneke at anandrews@deloitte.co.za. We also welcome you to visit the Deloitte RecruitTalent website.

Since decolonisation, approximately 40% of all African professionals have left the continent’s shores, and the skills shortage in Africa is subsequently a critical constraint on investment, job creation and improved public services. As a direct consequence of this loss of skills, it has been estimated that the continent spends close to $4bn on technical assistance each year across sectors such as health, education, environment and public management.

African leaders have identified this problem and the huge challenge it poses. The recognition of the importance of diaspora, and the attempt to reinvigorate social, political and economic life, are attempts to turn the historic “brain drain” into a “brain gain”. Simultaneously, a major demographic shift is taking place, as the baby boomers are getting ready to retire. By one estimate, half of the top people at America’s 500 leading companies will retire over the next five years, while an international competition for recruiting the best and the brightest is “hotting” up.

African countries have to compete on an international level with everyone else to ensure that critical skills are available to support their economies. Most of these countries, with their inept governments and chronic instability, are doing a “phenomenal job” of exporting their best and brightest to other countries.

A recent survey indicates evidence of such:

• The majority of those surveyed lived in Europe and North America
• 75% to 80% of them completed the majority of their schooling in Africa
• Most of them had very little work experience in Africa before leaving the continent
• The majority of them intend to return to Africa within seven years
• Those who do not intend to return left because of political reasons and the lack of security
• The majority of them had been sending money home to family
• The money sent to family was mainly for consumption and personal responsibilities, and it was usually sent by hand or International Money Transfer

Despite some setbacks in Africa’s political progress, the growth of democratically elected governments and the improvement in political and economic governance in many countries have increased the interest in African’s diaspora to engage constructively. Many African governments have taken the initiative to create awareness of job opportunities and employment within Africa.

Some initiatives include:

• Enabling private and public sector African employers and global economies with a footprint in Africa, as well as working together to boost skills inflow into key managerial and technical areas
• Fostering a debate in Africa and internationally with the African diaspora on how to contribute to an African- wide skilled strategy to change attitudes and perspectives and to ensure that governments and employers work together to make skill transfer easier, including opportunities to self-employed Africans
• Addressing cultural, social and other barriers, developing best practice among the identification and retention of professionals from outside and enabling the labour market in becoming more flexible

If you have any questions or require additional information, you may contact Helen Bimbassis at hbimbassis@deloitte.co.za or Anneke Andrews at anandrews@deloitte.co.za.

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The Higher Education Minister, Blade Nzimande

Deloitte Consulting, the National Treasury and the South African Institute of Chartered Accountants have partnered in a R72m programme which aims to upgrade financial skills at South African municipalities.

“The project, sponsored by the National Skills Fund, aims to train 500 employed municipal officials and  500 interns or unemployed graduates to meet minimum competency standards as set out by the National Treasury. Deloitte, an accredited provider against the regulated qualifications, will be responsible for the training and mentorship of candidates against unit standards as per the regulations gazetted on 19 June 2007, (gazette nr 29967)”, say Madi du Toit of Deloitte. You may contact Madi du Toit at maddutoit@deloitte.co.za for more information.

The Higher Education Minister, Blade Nzimande said that the initiative will introduce minimum standards of competence for financial and supply chain managers. He also stated that training municipalities to manage their finances will also bring better service delivery.

I have listed a number of independent sources that reported the announcement.

SABC News:     Training of municipalities could address protests: Nzimande

Business Day:   Financial skills programme aims to boost service delivery

Business Live:   Project to upgrade financial skills at municipalities

The New Age:    Training could address protests

News24:            Nzimande wants local govt to up standards

Times Live:       Training could address protests: Nzimande

City Press:        Municipalities to get financial training

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This paper, prepared by Ebrahim Takolia of Deloitte Consulting, South Africa, is aimed at all decision-makers, across all industries. I have provided an introduction below and welcome you to download the full paper which is very comprehensive and highlights challenges, opportunities and the effects mineral beneficiation will have on businesses. If you have any questions or require additional information, you may contact Ebrahim Takolia at etakolia@deloitte.co.za. Click Here to download the Deloitte Mineral Beneficiation paper.

Positioning for mineral beneficiation – Opportunity knocks

Mineral beneficiation is a priority for governments of resource rich countries that would like to leverage the potential of mineral beneficiation to create local employment and drive economic growth. Many governments are developing strategies for domestic mineral beneficiation.

South African President, Jacob Zuma, has said that mineral beneficiation is a priority for his government and will finalise and adopt a beneficiation strategy as its official policy. In June 2011, government released a strategy that identified a number of instruments such as policies, legislation and incentives that can be put in place to enable beneficiation.

A mining company will typically be in one of the following assessment phases with respect to beneficiation:

Strategic Assessment: an analysis of the strategic considerations as well as risks and opportunities for mineral beneficiation, particularly focusing on the business case and taking into consideration government incentives and social imperatives like job creation;

Feasibility Assessment: the beneficiation opportunities have been identified and feasibility studies need to be undertaken to determine the viability of such initiatives; or

Implementation: the feasibility of an initiative has been determined and an implementation plan and schedule needs to be developed.

This paper is the first in a series about beneficiation and will be updated as legislation and incentives come into effect, which assesses the merits of beneficiation.

Download the full article . . . . Positioning for mineral beneficiation – Opportunity knocks

We welcome your feedback on this interesting and topical subject!

This article was written by Lungelo Nomvalo, Director at Deloitte Consulting. The intention behind this article is to initiate debate with government leaders around the issue of service delivery within the metropolitan councils and ways in which to improve service levels. Lungelo may be contacted directly at lnomvalo@deloitte.co.za

A Framework for Improving Service Delivery in the Metros

by Lungelo Nomvalo of Deloitte Consulting

The recent episodes of service delivery protests and billing challenges experienced in the local sphere of government underline the challenge to introduce a more coherent and structured approach to improve and sustain service delivery in metropolitan municipalitiesi (metros). The proposed Turnaround Strategy for local government proved to be hard to implement and highlights a strong imperative to define a new comprehensive approach that focuses beyond operational issues.

In addition, the recent local government elections that saw the ruling party experience marginal losses in certain municipalities also suggests a growing trend of a more assertive electorate that is primarily focused on service delivery excellence.

This paper, proposes a new integrated framework that comprehensively addresses the three strategic levers that are an integral part of the journey towards achieving the vision of a world-class metro. In recent times, local government in South Africa has witnessed a significant deterioration in the three strategic levers, namely:

Revenue Management: Many municipalities are under severe financial pressure stemming from their reduced capacity for collection of revenue for services rendered to their citizens. This impacts their ability to expand and sustain service delivery. The recent billing challenges experienced by the City of Johannesburg highlight significant underlying risks in the revenue management functions of municipalities.

In addition, South Africa needed to get back to the tax-to-GDP ratio of just over 27.6%, which prevailed before the recession. The revenue outcome increased the tax-to-GDP ratio from 25.2% to 25.3% of GDP for 2010/11 ii. This puts significant pressure on the fiscus to adequately fund priority programmes in the local sphere to improve service delivery.

Service Delivery Excellence: Local government continues to experience significant challenges related to the provision of basic or improved services to citizens. This is evidenced by the growing number of grievances from citizens suggesting most importantly that citizens have high expectations of their local municipalities with respect to improved delivery of services.

Institutional Capacity: Our experience with local government suggests a pervasive lack of robust institutional capabilities to support service delivery excellence. The challenges relating to operational excellence range from poor financial management, revenue management, customer management, and risk management.

Read the full article . . . . Improving service delivery in South African metropolitan municipalities

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This article was posted on the IOL Business Report on the 25th May. Access the original article - Public Sector must find partners

To become globally competitive and realise Africa’s true economic potential, significant improvements in infrastructure are required in a short space of time.

According to a recent Deloitte research study, 77 percent of senior global business executives believe that the current level of global public infrastructure investment is inadequate to support their companies’ long-term growth, adding that over the next five years, infrastructure will become a more important factor in determining where they locate their operations.

The credit crisis has, however, meant that there are a greater number of priorities competing for public funds, therefore traditional models of financing and delivering infrastructure must give way to new models and a portfolio of hybrid approaches, each with its own distinct mix of public and private participation.

Globally, governments are increasingly forging relationships with private sector specialist companies to render service delivery initiatives for infrastructure and public services. This practice is gaining momentum in many African countries as well, with public-private partnership (PPP) frameworks being established in a number of jurisdictions.

Under these arrangements, private sector business acumen, technical skills and finance are combined with public sector strategic insights on service delivery, as part of a collaborative effort to optimise efficiency in public sector service delivery. Many new projects being conceptualised are cross-border, regional or pan-African, thus increasing delivery complexity.

The central question facing infrastructure policymakers today is: what should the optimal mixture of public and private sector participation be in the project to maximise public value?

Most infrastructure projects are composed of five elements for which responsibility must be assigned: design, finance, construction, operation and maintenance. Theoretically, any of these elements and their related risks can be allocated to either the public or private sector.

The shape of that risk allocation determines the structure of the partnership and the costs. Agreeing this risk-sharing allocation has often been a stumbling block.

In order to ascertain the right mix of public and private involvement in infrastructure financing and delivery, there are three steps that one should follow.

First, what are you allowed to do?

Are there political, legal or policy constraints that would make it difficult to use certain partnership structures, or are regulatory changes needed to follow the PPP route?

Second, what do you want to do? In defining the project goals, initially the need must be defined, followed by the service solution and the assets required to meet that need. Once policymakers have decided how the solution will be delivered and funded, the political will to drive the project to a speedy conclusion is important.

Finally, who can and should do what? A partnership implies a sharing of risks and rewards, so one party cannot carry all the risk in a successful PPP. The public entity’s capabilities to deliver or manage the various phases of the project should be determined, and then the methods of risk transfer and compensation can be allocated.

It is estimated that for every R1 spent on infrastructure, R1.40 is added to a country’s gross domestic product.

PPPs are the ideal vehicle for funding the gaps in infrastructure in Africa, but principled and informed choices are needed to drive this growth.

Click here to connnect with André Pottas (Infrastructure Advisory Leader for Africa at Deloitte) on LinkedIn

Read the the Deloitte blog post titled Infrastructure Finance, the changing landscape in South Africa

Visit the Deloitte Public Sector website

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Over the past three weeks, both the DA and the ANC have run “town hall” discussions on twitter to interact with citizens of South Africa. This introduces a new age of campaigning in South African politics by converting traditional one way media broadcast into real time engagement. During these tweet sessions, questions were asked and answered through 140 characters.

• DA – 2985 tweets over 3 sessions on Sunday’s at 8pm using #DAQA
• ANC – 1100 tweets over 2 sessions on Friday’s at midday using #ANCLive

It is interesting to note the different ways that each party used twitter as a communication channel. The ANC opted to broadcast through a single twitter profile. In comparison, the DA used a more engaging tactic by allowing multiple DA representatives to interact rather than all the responses being distributed from a single twitter profile. During the #DAQA discussion, DA officials interacted in their personal capacity.

The diagram visualises the different engagement methods (broadcast versus interaction) and reflects the intensity of the discussions that took place.
Given the growing reach of twitter in South Africa and the growing adoption of social networking, this platform is bound to be more widely used to engage with communities. Deloitte uses visualisation techniques to understand influential relationships within communities on social media. Contact Deloitte to find out how these techniques can be used to understand your influence in the market space.

You and your valued clients are invited to attend the risk event of the year! Due to limited numbers, your RSVP is essential.Deloitte is sponsoring the venue for the Gauteng Information Security Group of Africa  chapter meeting, a Section 21 company established in 2005.  An interactive panel discussion with several local and international experts will be chaired by Craig Rosewarne from Risk Advisory.  A number of members from both public and private sector organisations as well as delegates from the press will be in attendance.The event takes place on the 25th March (starting 8:30 and ending at 4:00 pm) at Deloitte, Building 33, The Woodlands Office Park, Woodlands Drive, Woodmead, Johannesburg, Gauteng, South Africa.    Discussion topics will include: The importance of skills development in Africa Test of Courage – What is your risk appetite? Innovative learning into the 21st Century Enterprise Risk Management – the Risk Intelligent approach Business perceptions of their Governance, Risk Management and Compliance functions  – Suggested action points Aligning business to IT – Valuable feedback from the 2011 IT-Business Balance EMEA survey The role of Analytics in Risk Management Aligning Integrated reporting with the Business Strategy The RA Foundation challenge  Cyber Security & Information Security challenges facing Africa.

Join an interactive panel discussion comprised of local and international experts to find out what lessons Africa can learn from international initiatives and challenges faced in other countries across the world. For more information, or to RSVP please contact Dawn Cracknell on dacracknell@deloitte.co.za