Chairperson, hon members, we sat in this House on 24 June to table the Mineral and Petroleum Resources Royalty Bills to give effect to the policy framework arising from the Mineral and Petroleum Resources Development Act.
The first draft of the Mineral and Petroleum Resources Royalty Bill was published by the National Treasury for comment as far back as 20 March 2003. The Bills being debated today are the fourth drafts, and I can safely say that these Bills have been the subject of extensive consultation and debate with all relevant stakeholders. I am sure, Chairperson, that if you asked any of the members of the Portfolio Committee on Finance to recite any part of this Bill in their sleep, they will do it gladly.
Firstly, in respect of tax base, the Mineral and Petroleum Resources Development Act laid out some very important principles that are intended to ensure that all South Africans benefit from the vast mineral resources that this country is endowed with. Based on extensive research and practical considerations, it was decided that the tax base will be the value of the minerals mined, that is, gross sales less transport costs between the seller and the buyer of the final product. Resource rents or mineral royalties should be payable irrespective of whether mining companies make a profit or not. Then, in respect of tax rate, the earlier versions of the Bill provided for various specific royalty rates for different mineral resources. The need to provide some form of relief in the case of marginal mines, both during start-up operations and when a mine is close to the end of its life span, proved to be a challenge.
To ensure equitable royalty rates and in response to requests for relief for marginal mines, a formula-based royalty rate structure has been proposed. In terms of this formula, there is one for refined minerals and one for unrefined minerals. The applicable royalty rates will vary according to the profitability of the mining company, subject to a minimum rate of 0,5% and maximum rates of 5% and 7% for refined and unrefined minerals respectively. For the purpose of these Bills, oil and gas production will be subject to the refined formula. The lower rates for oil and gas are an acknowledgement that there have, as yet, not been major findings of these resources in South Africa - more's the pity.
The profitability parameter in the formulae is Earnings before Interest and Taxation, EBIT, and it also allows for 100% capital expensing. The 100% capital expensing is an acknowledgement of the high capital costs associated with deep underground mining, currently in the case of gold and in future some other minerals, and deep level sea oil and gas exploration and production.
The formulae-based royalty rate structure does not only provide automatic relief for marginal mines, but also allows for the state to share in the upside in times of high commodity prices, such as the times we are living in now. Royalty rates will tend to increase as commodity prices increase and vice versa.
In terms of community royalties, the Mineral and Petroleum Resources Development Act protects the rights of certain communities to continue to receive community royalties. These community royalties will not be allowed as an offset against royalty payments to the state. Contrary to the views of many mining companies and analysts, such payments to communities are not viewed as double royalties. Mining companies and communities are also encouraged, where deemed appropriate, to convert the interests of communities into equity.
The full earmarking or ring-fencing of mineral royalty revenues is not supported. However, government is amenable to consider an on-budget spending programme targeted at mining and labour-supplying communities directed at human or local economic development, where these are properly justified on a partnership basis.
In this regard, a clear framework to prioritise projects, develop effective partnerships and governance guidelines will be critical. It should be noted that mineral royalties' revenues will tend to be cyclical, especially given the commodity price cycle. Such revenues may decline over the long term as a result of the gradual depletion of our mineral resources.
The benefits of our vast mineral resources, some of which are about to be depleted, have historically accrued to only a few. The Mineral and Petroleum Resources Development Act lays the foundation to ensure that the mining industry transforms benefits to larger sections of our citizens. The Mineral and Petroleum Resources Royalty Bills of 2008 will make a contribution towards greater transparency, sustainability and the distribution of benefits to all South Africans.
I want to take this opportunity to thank everybody involved in this process, but certainly the Portfolio Committees on Finance and Minerals and Energy for their contribution as in the final version of these Bills. I trust that the Bills will be supported by this House. I thank you, Chair. [Applause.]