This paper reviews the Mineral and Petroleum Resources Royalty Bill of 2006, identifies potential areas that require further consideration by the National Treasury and, where appropriate, offers alternatives. At its basic level a royalty regime consists of two elements: the base and the rate that must be applied to the base. Deciding on an acceptable royalty rate is a complex matter and can be done only after extensive analysis of all variables affecting the competitiveness of the regime. The proposed royalty rates are in the range of zero to five per cent and are based on sales revenue. It is argued that future investment patterns are more likely to be influenced by market cycles and commodity prices than policy events. Inevitably the current boom in the minerals sector will come to an end and the success of the proposed regime will be known only when profit margins are under pressure. Policy makers must therefore have the long run in mind when developing policies that affect the ability of industry to do business, without the need to renegotiate each time there is a change in the market. A long-run policy must be sufficiently flexible to allow for consistently fair sharing ratios and splitting of revenues between government and industry. Although broadly in line with international practice, the current version cannot be regarded as internationally competitive and efficient. In order for the royalty bill to become internationally competitive, promote beneficiation of mineral production and adequately compensate the State for the loss of a national resource, the National Treasury should heed the following main recommendations in this review: 1. Abandon the notion that each mineral product must have its own royalty rate; 2. Introduce an NSR type royalty that allows for value-addition costs to be deducted from the base; and 3. Provide for automatic relief through the use of a sliding-scale mechanism based on ability to pay, e.g. the X-Factor used in the gold mining tax formula.
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