South Africa has the resources and infrastructure to contribute to the just energy transition. What is needed is the necessary infrastructure to realise the country’s true mineral potential. This is according to CHRIS GREEN, Managing Partner at Hogan Lovells, Johannesburg. GERARD PETER reports.
Green starts by pointing out that mining in South Africa is far from a sunset industry and is key to the future of the sector on a continental level. “At the recent Mining Indaba, much of the discussion focused on the role that mining plays and will play in the just energy transition, specifically in the African context.
“There can be no energy transition without the mining sector: the metals and minerals that the world is going to rely on increasingly to give effect to the energy transition have to come out of the ground through the mines and, for this reason, the mining sector is and will remain fundamentally important.”
He adds that challenges for mining in South Africa are not a result of any dearth of mineral resources or of the mining companies’ inability to extract those resources.
Rather, the sector is being stymied by systemic infrastructure constraints that make it difficult to take advantage of global demand for these commodities.
“In addition to load shedding, our port and rail infrastructure has been severely impacted because of malfeasance and maintenance issues.
“For example, the capacity to export natural resources at some of our ports is at its lowest since the advent of democracy. This is preventing us from being a leading supplier of these minerals.
“If we can get this right, then South Africa will be at the forefront of the essential supply chain for green technologies going forward.”
Weighing in on the conversation, Deepa Vallabh, M&A Partner at Hogan Lovells, adds that mounting infrastructure challenges and the electricity crisis have a negative impact on attracting foreign investment into the country.
“With the port crisis and the logistics of getting commodities to market, these are significant impediments to attracting foreign capital into the country,” she states.
Mining in South Africa: Attracting foreign investment
Vallabh further adds that regulatory certainty is paramount to encourage foreign investment into the country.
“For a number of years, there was a lot of focus on black economic empowerment (BEE) legislation not being clear enough, but now there is a wide understanding of these requirements and therefore the legislative framework is better understood, and this creates a level of certainty.”
She points out that the current legislative framework is not a stumbling block to progress in the sector: rather it is the implementation of such policies.
“This boils down to governance at the various departments. Also, it is important to ensure that legislature is not overly prohibitive in terms of cost of compliance which, in some cases, the mining legislation is – but I think that’s a global phenomenon in this industry and not unique to South Africa.
Meanwhile, Green points out that stability in the regulatory framework is paramount to attracting investment. “The legislative framework might include provisions which investors would prefer are not there. However, if a regime is clear in terms of what it requires and is not constantly changing, then investors can get their heads around it,” he states.
To emphasis this point. Green cites the example of Tanzania from 2017 to 2021. During this time, the country and the mining sector went through a period of significant regulatory uncertainty where regulations and statutes were changing almost monthly.
“This had a negative impact on foreign investment in the country’s mining sector. Now that there is some stability, you can see quite clearly that the picture with respect to foreign investment has changed significantly for the better.”
Creating investor confidence also boils down to politicians getting their act together. Green explains that South Africa has a minister of minerals and energy who’s responsible for energy policy.
Then there is a minister of public enterprises where a lot of these physical assets are housed as well as a newly announced position of minister of electricity. The obvious risk is that these various ministries don’t speak to each other and that just takes us a step backwards in terms of ensuring stability.
“However, in his responses to various points of debate on his State of the Nation Address, President Cyril Ramaphosa said that each ministry will have clearly defined roles. For example, the minister of electricity will oversee everything relevant to Eskom and the current energy crisis. If so, I think it will be a positive thing for investor sentiment.
“But if that doesn’t prove to be the case and we end up with an additional layer of infighting then it’s going to cause issues from an investment perspective and we are not going to move forward in resolving the energy crisis.”
Challenges create opportunities
Vallabh echoes Green’s earlier sentiment that South Africa has a key role to play in the just energy transition. “At Mining Indaba, we saw renewed interest from mining companies to increase production levels, to get more capital and seeking alternative ways to feed into the just energy transition.
“So, there’s a lot of energy, focus and positivity around the industry and the opportunities presented by the challenges we face. The test would be to see how we can take advantage, capitalise on it and make sure that we are at the forefront of delivering what we can deliver in terms of the commodities that Africa has,” she states.
Green adds that the fundamentals for the mining sector are strong. “We’re a resource-based economy and have been for many years. As we move into the just energy transition, that should continue to be the case.
“If we can sort out our infrastructure challenges as well as overcome the corruption in the economy, then I believe we can fully unleash the potential of the South African mining sector,” he concludes.