What we have before us today is the much anticipated and debated Mineral and Petroleum Resources Royalty Bill, 2008. This Bill completes the policy framework arising from the Mineral and Petroleum Resources Development Act, the MPRDA of 2002, which restructured all South Africa's mineral rights. As many in this Assembly remember, the MPRDA requires conversion of all old order rights into new order rights by May of next year. The newly proposed royalty is designed to tie into this conversion.
It should be noted that the proposed royalties have been the subject of extensive consultation and debate. Numerous meetings and workshops were held to ensure that the final versions of these Bills were consistent with the best interests of all stakeholders and the objectives of the MPRDA.
In deciding on the appropriate tax base it's crucial to have a clear understanding of the primary objective of resource royalties. Resource royalties are actually not a tax. They instead represent compensation for the permanent loss of nonrenewable commodities. These royalties are payable to the state as custodian of the country's mineral wealth.
Based on extensive international comparisons and practical considerations, it was decided that the tax base would be the value of the minerals mined and transferred. We resisted proposals to use the profits of the mine as the base for the royalty calculation. Resource rents or mineral royalties should be payable irrespective of whether mining companies make a profit, given the irrecoverable loss of mineral resources.
Earlier versions of the Bill provided for different specific royalty rates for various mineral resources. These different specific royalty rates were largely based on international comparisons and an implicit assumption that the more valuable resources, for example diamonds, should be subject to a higher royalty rate.
However, a need existed to provide some form of relief in the form of lower royalty rates in the case of marginal mines, both during start-up operations and when a mine is closed at the end of its lifespan. In order to remedy these concerns, the final version of the royalty utilises two formulae: one for refined minerals, which is in the Schedule 1 list, and one for unrefined minerals in the Schedule 2 list.
The logic of having two formulae is that refined minerals undergo more processing and therefore more costs are incurred to develop the mineral ore into its refined state. This results in a larger base of gross sales, hence the slightly lower royalty rates. In the case of unrefined minerals the production chain is shorter, resulting in a relatively smaller tax base, hence its slightly higher royalty rates.
The formula not only provides automatic relief for marginal mines but also allows for the state to share in the upside in times of high commodity prices. The royalty rate structure should thus provide for long-term certainty and predictability for both the state and the private sector.
In respect of community royalties it is important to stress that the Act - the principal Act - protects the rights of certain communities to continue to receive community royalties. The proposed royalty equally does not interfere with the rights of established community arrangements. In addition, 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, payment to communities should not be viewed as double royalties. Mining companies and communities are also encouraged, where appropriate, to convert the interests of communities into equity. Some mining companies and communities have already concluded very successful negotiations in this regard.
Both the labour unions and mining companies have requested that revenues from mining and petroleum royalties be ring-fenced to projects in identified mining towns or labour-sending towns. The earmarking or ring- fencing of mineral royalty revenues is not supported. Not only is earmarking contrary to sound fiscal policy, but it would also negate the underlying principle of the Mineral and Petroleum Resources Development Act - that the minerals of our country belong to all South Africans.
Notwithstanding these concerns, on-budget spending is supported to the extent that this spending targets mining and labour-supplying communities and is directed at human and/or local economic development. In this regard, a clear framework to prioritise projects and develop effective partnerships and governance guidelines will indeed be critical.
There is much debate about the benefit of being a country that is endowed with mineral and other natural resources. The discovery of minerals, with which South Africa is so richly blessed, has been critical for the development of the South African economy. Unfortunately, the benefits of these vast mineral resources, some of which are close to depletion, have historically accrued to only a few.
Although the MPRDA lays the foundation to ensure that the mining industry transforms for the benefit of the larger section of our nation, much more needs to be done to ensure that all citizens, ordinary workers and local communities share in these benefits. The Mineral and Petroleum Resources Royalty Bill of 2008 will make a contribution towards greater transparency, sustainability and the wider distribution of benefits.
I would like to express our sincere appreciation to Chairperson Nhlanhla Nene and the members of the Portfolio Committee on Finance, and also the Chair and members of the Minerals and Energy Portfolio Committee for their valuable role in the process. Deputy Speaker, I hereby introduce the Mineral and Petroleum Resources Royalty Bill of 2008. I thank you. [Applause.] Bill referred to the Portfolio Committee on Finance for consideration and report.