ENGAGING WITH THE ANC YOUTH LEAGUE ON NATIONALISING THE MINES

Last week the Youth League of our country's ruling party formally adopted two sets of policy proposals to shape our country's future: nationalising the mines and expropriating without compensation.  These proposals are deserving of the attention and reasoned response from all citizens who share an investment in our future.

What is set out below is just such a response focussed on the policy proposal for mines nationalisation and the ideas associated with this policy.   It is not focussed on the people or personalities proposing these ideas, as this generates more heat than light.

We will be asking three sets of question which should be asked of all public policy. What will be likely benefits for the nation of these policies?  And what will be their likely costs?  What are alternative policies that might as well, or better, achieve the intended goal of these policies?

Nationalising the mining industryNationalising the mining industry and expropriation without compensation are described as two of the seven cardinal pillars for economic freedom in our lifetime in the Youth Congress closing Declaration.

On page 12 of the Programme of action for economic freedom document referred to above five benefits of nationalising mines are set out:

a. Increased fiscus and therefore more resources for education, housing, healthcare, infrastructure development, safety and security and sustainable livelihoods for our people.

b. More jobs for our people because State owned and controlled Mines will increase local beneficiation and industrialisation of Mineral resources. This will in turn reduce the high levels of poverty, which is the consequence of joblessness.

c. More equitable spatial development because State owned and controlled Mines will invest in areas where Mining is happening.

d. Better salaries and working conditions in Mines will increase the Mining wage and improve compliance to occupational health and safety standards.

e. Greater levels of economic and political sovereignty as the State will be in control and ownership of strategic sectors of the economy, which produces minerals resources needed across the world.

More taxes

In 2010 the mining industry paid R17.1 billion in direct (corporate tax). R16.2 billion was paid to shareholders, the providers of capital who enabled the investments that started the mines in the first place. Nationalisation would imply that the government would then get the R16.2 billion in dividends, to add to the R17.1 billion already received in direct corporate tax. 

Leaving aside the extraordinary cost of acquiring the mines, dealt with below, this would only be true if the state were able to fund  the R17 billion deficit between the income (R424 billion) and expenditure (R441 billion) of the sector.    On these numbers, the national treasury would be worse off if it had been both government and owner - and that assumes that nationalisation has no impact on skills retention or operating efficiencies of the mining companies.

Perhaps the key issue here is the perception that mining companies are just "dirt diggers" that export all the benefits offshore with no value addition or benefits accruing locally.  The reality is quite the opposite: in 2010 the mining industry's total expenditures were  R441 billion, on procuring goods and services, on wages ,capital expenditure, depreciation, corporate taxes, dividends and in interest payments. It is estimated that only R34 billion or 7% of the expenditure went offshore in the form of dividends, a bit of interest and on goods and services not provided for in South Africa: in other words 93% of value of the expenditures of mining companies stay in South Africa to benefit local industries and South Africans.

Secondly, the scale of local downstream beneficiation is also very large. All of South Africa's cement, 94% of our electricity, 80% of our steel, 30% of our liquid fuel requirements, most of our plastics, polymers, waxes, explosives, fertilisers, etc., are made in South Africa using South African mined products. The country accounts for 20% of the world's production of platinum catalytic converters and a multiplicity of other minerals are further beneficiated in the country. Estimates suggest that R200 billion in extra sales value and over 150 000 jobs are created in downstream beneficiation industries using locally mined minerals.

We also need to take more than a one-year view.  If governments have to provide all the resources for mining from the most basic exploration for new ore bodies, to mine construction, mine maintenance and environmental rehabilitation at the end of mining it seems highly implausible that they would earn more from mining from owning mines than for regulating them. And this is at a time when the state is turning to the private sector to help fund infrastructure roll out in electricity and transport because it simply does not have enough resources to fund all the demands of its core activities, or indeed the capacity to run these facilities.

The implausibility of generating more resources from nationalisation is confirmed very recently by the Zambian Minister of Mines who said that during the dismal period of nationalisation, the copper mines cost the country $1m per day (some $365m per annum) whilst under privatisation they were now earning the state $1m per day, a swing of 200 percent!

This is why the trend worldwide from China to Russia to Brazil to Vietnam is away from state ownership of mining.

More jobs

Putting more South Africans to work is a goal all should share.  There is a compelling case to challenge both the public and private sector to increase employment wherever they can though government's New Growth Path rightly states that the overwhelming majority of employment creation will be by the private sector (and implicitly by new firms as the economy grows faster).  The mining sector currently employs 500 000 people directly and creates another 500 000 jobs through the expenditure multipliers and industries that either use mining inputs or supply inputs to the mining sector (i.e. 12% of total formal sector employment). 

In mining, as in other sectors however, creating more sustainable jobs depend on growing the sector, finding more mineral resources (increased and better exploration) producing more from existing resources (better technology and productivity) or marketing existing production more effectively.

Does comparative experience suggest that state owned mines do any of these three things better than privately owned mines?  The international evidence again is overwhelming that it is the private sector mining companies that best create long term sustainable employment through productive investment.

Better spatial development

Again all South Africans should agree that we need to change the spatial character of the South African economy, where so often poor people live long distances from where they work.  We just don't understand how state ownership of mines (whose location is determined by where ore bodies are found) would change this.

Better salaries and working conditions

Salaries are currently determined by collective bargaining and occupational conditions by law and regulation.  Unions help determine the first of these, and the Department of Mineral resources the second.

In 2010 wages and salaries accounted for R78.4 billion, compared again to R16.2 billion in dividends, and R17.1 billion in taxes.  If salaries are to go up (when sales remain constant) what will go down?  The evidence elsewhere in the world is that when governments cannot find extra resources from the fiscus to pay salaries to which they are committed and can't or won't reduce the number of employees to make up the shortfall, they resort to the printing press, so progressively devaluing the wages their employees earn in real terms (i.e. through fuelling inflation - where everyone loses).

Greater economic and political sovereignty

The state holds all South Africa's mineral resources in "custodianship", and decides through a licensing system who is able to explore and exploit them.  This was one of the fundamental achievements of the Mineral and Petroleum Resources Development Act (MPRDA), which changed the previous system of private and public ownership of mineral rights into a state custodianship system. Via the MPRDA and Mining Charter the industry has been opened up and a large degree of access to ownership and management of mines for historically disadvantaged South Africans has been created.  How much greater sovereignty is given by also owning the private mining companies that do this?

And what about the costs?

We need firstly to consider the costs of taking ownership.  Would this be done without compensating any present owners?  Black South Africans are beneficiaries of about half of the institutional holdings in mining shares and so millions of black South Africans as well as their white counterparts would lose large portions of their savings and pensions which would be expropriated by a state in the name of enhancing their welfare! 

And if foreign owners (substantial in all mining sectors, often more than 50%) were not compensated foreign governments including Chinese, Indian, Russian and Brazilian, in addition to traditional developed world investors would be likely to invoke international treaties.  South Africa's membership of the BRICS would immediately be in jeopardy and South Africa would move from a respected member of the international community to a similar pariah status to that it held during the apartheid years. 

Major black owned mining companies and BEE participants would of course be added to the losers in the case of expropriation without compensation.

The market capitalisation of listed mining companies on the JSE is R1.9 trillion or 43% of the total market capitalisation of the JSE, so in the case of part or full compensation the South African government will need to move very significant resources from present essential applications: in other words less infrastructure, less health, less education, and less welfare spending.  There are significant trade-offs that government has to balance. The diversion of resources for investment in mining would mean that other vital expenditures would suffer.

Why would anyone want to spend R1.9 trillion in state resources (which would massively add to the country's debt levels), when the benefits of the expenditures, downstream beneficiation and employment are already substantially created by the mining sector in South Africa. The cost-benefit analysis of nationalisation just does not make economic sense.

More important than this once off cost however is the cost of foregoing non-state investment in the future of our mining industry.  A mine is a factory whose construction is never finished.  Mines are capital hungry economic machines.  South Africa is a capital scarce economy - the state lacks the resources to fulfil its existing roles. 

The very strong likelihood is that our mining industry would sink rather than grow if it only has access to state investment.  This is especially so as many of the skilled personnel on which the functions of the mines depends will more easily be recruited into the international mining industry which is facing dramatic skills shortages and is hungry for good South African skills.  The lesson of history is that in democracies, citizens are not inert pawns to be moved around at will by power driven politicians.

There are other important but perhaps less tangible costs.  State ownership of such a large industry denies the opportunity of both entrepreneurship, of venture capitalism and of business ownership to citizens of all races.

Also when government becomes both the economic player as well as the economic regulator conflicts become compounded.  This is a lesson repeatedly taught by recent history.

Are there alternatives policies that might work as well or better?

The Mining Charter, a document whose intention was to govern the race, gender and indeed broader transformation of this sector, was reviewed and revised in September of last year. 

The new Charter sets out specific targets with regard to race ownership, equity procurement, equity enterprise development, beneficiation, employment equity, human resource development, mine community development and housing and living conditions.  Specific timelines are attached to each of these targets, sometimes year by year.

This is a more detailed plan for transformation than any we are aware of applying to any part of the public sector. 

The revised Charter was negotiated between government, trade unions representing mine-workers and the representatives of shareholders.  Such a social compact is worthy of analysis and debate.

A second stakeholder process is also underway in this industry aimed at growing the pie available to all South Africans by exploiting South Africa's untapped mineral wealth (by some reckoning the largest in the world).  This is the Mining Industry Growth, Development and Employment Task team (MIGDETT). 

The task of this process is to ensure the long-term growth and meaningful transformation of South Africa's mining industry, as well as the equitable inclusion of all stakeholders in that growth.  A dialogue between this process and those who argue for nationalisation should be to benefit of both, and indeed all South Africans.  Resources that lie beneath the soil represent only potential not actual wealth.  Slogans and poor policy will ensure that they stay that way and South Africans will all be the poorer.

Bobby Godsell is chairman and Michael Spicer CEO of Business Leadership South Africa. An edited version of this article first appeared in Business Day.

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