State Intervention in Mining is Not Good for South Africa

Monday, July 2, 2012 - 16:03
In this article, the author looks at nationalisation and its possible disadvantages to the economy, following a call for the country’s mining sector to be nationalised

Surprise, surprise! The African National Congress’ (ANC) State Intervention in the Minerals Sector (SIMS) Report refutes the case for ‘nationalisation’ by confirming what most rational people have known all along. Essentially, it is too expensive if it occurs with compensation (R1 trillion-rand-plus) and too damaging to foreign investment if it occurs without.

The SIMS report is the result of the ANC’s decision to investigate the possibility of nationalising the mining sector in South Africa. The report provides a framework for the debate facing the ANC’s National Policy Conference, currently underway from 26-29 June 2012.

The authors of the SIMS report, perhaps to justify the vast amount of resources expended on the research, not surprisingly, still propose significant state involvement in the mining sector. The cynical reader may argue that perhaps they were never meant to make the case for nationalisation but rather to come up with a more ‘moderate’ position which would compare favourably with the extreme of nationalisation.

One recommendation is that government introduces a 50 percent Resource Rent Tax (RRT) on mining ‘super profits’ defined as a rate in excess of Treasury Long Bond Rate plus 7 percent (currently about 15 percent). The proceeds would be ring-fenced in a Sovereign Wealth Fund (SWF) and used to finance a Fiscal Stabilisation Fund, a Regional Development Fund and a Minerals Development Fund. The report omits to mention that most mining countries have rejected having a RRT on ‘super profits’ because it deters investment and is ultimately bad for the people of the country.

Every South African, including politicians and union executives, needs to acknowledge this very basic truth. Higher taxes mean less available resources to save and invest. Less investment leads to lower productivity which leads to less output which brings in less income which results in lower wages and fewer employees. With limited investment and low output, a company cannot expand and employ more people. An RRT, at the very least, will prevent companies from expanding their operations and becoming more efficient. At worst, it will drive many of them out of the country altogether and prevent others from considering investing here.

Once the RRT is introduced, it is proposed that the minerals royalty tax should be reduced to one percent of revenue. The proceeds from this tax would be ring-fenced and used to fund the Minerals Commission whose role would be to regulate and administer the granting of mineral rights. Apparently, despite the government, through the Minerals and Petroleum Resources Development Act, already having a monopoly on the issuing of concessions (mining licenses), this function ‘has not been carried out in a manner which maximised our development and job-creation objectives’.

The National Union of Mineworkers (NUM), the biggest constituent of Congress of South African Trade Unions, wholeheartedly supports and endorses the ideas contained in the SIMS document. NUM, by virtue of its size and presence in the mining industry, is afforded an inordinate amount of power in the proposal. Trade unions already have a significant stake in the mining companies by virtue of their investment holdings, yet the SIMS proposal implies that this is not enough and suggests that, “Unions should pool their mineral holdings with the state in a SPV (Special Purpose Vehicle) that would then have a major influence on the mining companies...”. It goes on to  recommend that the trade unions, along with the Treasury, the Minerals Commission, the State Minerals Company and local government should be the custodians of the proceeds from the Mineral Royalties Tax and have a part in deciding how to distribute them.

This situation is untenable and demonstrates why the tripartite alliance has detrimental consequences for the economy. The proposal is purely politically motivated, especially when it puts forward that the unions should play a major role in distributing the funds taken from the mining companies. Such a proposal contradicts the fundamental principles of government finance, which requires that all taxes should be collected by the Treasury and disbursed in a manner approved by Parliament in the annual budget.

Mining union executive support for increased taxes to be levied on the mines displays their disregard for the best interests of their unions’ members. Mining companies compete against all other companies, local and international, for scarce capital to invest in growth and improvement and thereby increase the incomes of their companies. After paying for goods and services provided by outsiders, the net income is distributed; first, in salaries and wages to mine employees, second, in taxes to government, third, to reserves for future running expenses, and fourth, to shareholders in dividends to pay them for the use of their capital and compensate them for the risk on their investments. If government introduces an additional tax, part of it will most certainly come out of the money that would otherwise have been paid in salaries and wages. Is this what millions of hard-working union members want? When union executives get involved in purely political activities and support policies that are harmful to industry, they act contrary to their members’ interests. Anything that harms a company simultaneously harms its employees.

The findings from their research on mining sectors in other countries lead the authors of the SIMS report to write, “State-owned enterprises, which often struggled to deliver the expected higher revenues in the boom years due to inefficient operations, became an even greater drain on government finances... Some began a process of privatising their mining industry and confined government’s role to one of regulation and investment promotion. Others commercialised state enterprises, lowered the level of state participation and placed greater emphasis on attracting private sector involvement. Countries that made significant changes in this direction included Bolivia, Chile, the Democratic Republic of Congo, Ghana, Indonesia, Peru, Brazil and Zambia.” In all cases, output increased during these privatisation episodes because of renewed investment and greater levels of efficiency in stark contrast to the preceding era when governments interfered and promoted political objectives supposedly in pursuit of ‘the development state’.

The ANC’s SIMS report is thin on details and thick on ideological rhetoric that places the government at the centre of the mining industry and vilifies the private sector as an evil entity to be despised by workers and society in general for not sharing the profits of mining activities. In reality, despite the shackles that constrain it, the mining sector already contributes enormously to the economy through the taxes it pays, the people it employs (both directly and indirectly) and the industries it supports by its mere existence, to name but a few. The ANC presumes that government, rather than the market is the only means by which a country’s wealth can benefit its citizens. If this were truly so, why, for instance, would the world’s poorer people migrate from countries where governments take on more social responsibilities to ones where such things are left to commercial and philanthropic private initiative?

- Jasson Urbach is an economist with the Free Market Foundation (FMF). This article first appeared on the FMF website.

 

Author(s): 
Jasson Urbach

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