The South African mining royalty regime: Considerations for modifying the system to balance its competing objectives

Abstract

Mineral royalties are one of the oldest forms of mining taxation, and were initially introduced to extract economic rents from mining. Over time, the royalty regime has become more complex as it was identified as an important policy instrument that can achieve more multi-faceted outcomes. Such a multi-tiered approach in the use of the royalty instrument is also the case with South Africa. With South Africa's new mineral royalty regime now in place for ten years, it is perhaps time to assess its impact and effectiveness. To carry out this assessment, an econometric evaluative study was undertaken using four major commodities in South Africa, namely gold, platinum, iron ore, and coal. The study explored five different policy options for government to consider and tested them to determine the most favourable one that will realize the regime's policy objectives. After the assessment, two major options stood out. Hence, this paper seeks to highlight which of the two options is the most favourable for consideration by policymakers. Based on that study, we find that the current structure is effective, but also recommend that the factors in the formula for refined minerals be 'modified' to reduce the capped profitability ratio from the current 60% to 30% and the maximum royalty rate for refined minerals from 5% to 3%. The minimum rate of 0.5% during times of depressed mineral prices and no or low profitability will not be affected.