Mining Charter 3: Opportunities and Challenges

by Ina King (Potgieter) August 29, 2019

Since the 19th Century, mining has been a central pillar underpinning South Africa’s economy. Now, with the gazetting of Mining Charter 3, hopes are being placed on the mining industry once again that it can be leveraged as a primary catalyst for South Africa’s much-needed reindustrialisation effort.

The Charter’s stipulations for 70% procurement spend on ‘local content’ in mining operations aim to create an environment of opportunity for the growth and transformation of the local mining supply chain by leveraging procurement capacity of domestic mining to create a market of locally manufactured goods.

It aims to transform supplier industries by enabling greater participation in the supply chain market by historically disadvantaged persons. As the South African Government contemplates the reduced demand for labour in lieu of increasing mechanisation and automation in the future, it is optimistic that a larger local manufacturing sector will be able to offset job losses associated with our transformation to an Industry 4.0 mining environment. Such initiatives should be applauded.

The way in which the local procurement target should be achieved is also prescribed in the Charter:

• 44% of procurement spend must be on goods manufactured by a B-BBEE compliant company
• 21% must be spent on South African goods manufactured by a company owned and controlled by Historically Disadvantaged Persons
• 5% is to be spent on items produced by a women- or youth-owned and controlled company

Tracking the ‘local’ in content

For these company’s goods to be certified ‘local’, at least 60% of their manufacturing / assembly must use South African products or services.

The production process of these products must be certified by the SABS. However, the current lack of common standards for identifying mining goods means difficulty in tracking what has been procured at an item level, which makes it almost impossible to accurately calculate the real local value of manufactured products.

One of the most pressing concerns in the verification of local content therefore is the establishment of a standardised product identification coding system that would improve overall traceability of products and make local content more visible throughout the supply chain.

While Article 2.2.3.1 of the Charter states that goods must be procured “in line with a standardised product identification coding system developed by the Department of Trade and Industry [dti]”, such a system has yet to be finalised, creating uncertainty and difficulties for suppliers in how best to verify the domestic production of their goods.

To this end, the dti is collaborating with non-profit standards organisation GS1 to develop an integrated framework to manage supply chain information using a barcoding system holding various information such as product numbers, serial numbers, batch numbers and even the amount of local content.

Such a standardised system will improve the efficiency of the mining supply chain, and will also enable local manufacturers to understand what imported products may be replaced through localisation in the future.

Given both the financial and capacity constraints of the SABS, priority must be given to ensuring the verification process is streamlined and efficient. Ensuring such a process can be secured within the stipulated 24-month grace period will require vendors and verifiers to work with the SABS, as has been done in the verification and consulting services industry for B-BBEE certification, as suggested by MEMSA chairperson Freddy Mugeri.

Additional hurdles for suppliers

Questions remain about how the requirements of the Charter could impact existing and long-term supplier contracts. Many of these long-standing business agreements are not in line with the new stipulations of the Charter, and attempts at renegotiating these terms or cancelling contracts outright may lead to disputes, lengthy litigation scenarios, as well as disruptions in certain mining operations.

Another potential consequence of the Charter might be possible contraventions of World Trade Organisation (WTO) requirements, which could jeopardise South Africa’s trade relations with international markets in economic areas far beyond the scope of its mining industry. These requirements were the results of other domestic protectionary measures implemented by a host of other countries including Brazil, India, Tanzania, Nigeria and Indonesia. The South African Government will need to ensure that it avoids any penalties that may have disastrous effects on the macro economy.

Despite these hardly insignificant challenges marking South Africa’s envisaged path of reindustrialisation, Mining Charter 3 may be a turning point in South Africa’s manufacturing base, and its potential to create greater economic value for South Africans should be supported.