There is a very old cartoon crafted by George du Maurier in 1895 depicting a conversation between the Bishop and the curate during breakfast: “I’m afraid you got a bad egg, Mr Jones”, remarked the Bishop. Feeling a little embarrassed, the curate offered a face-saving response: “Oh, no, my Lord, I assure you parts of it are excellent”. What a fitting commentary on the recently published ANC report on state intervention in the minerals sector.
On the first blush, the ANC’s wide-ranging report soothes the anxieties of the mining industry and investor community in its emphatic rejection of nationalisation. It argues that the consequences nationalisation is likely to wrought ‘…would clearly be an unmitigated economic disaster for our country and our people’.
It is suggested in the ANC Study Group report, for example, that the conversion of old order mining rights held under private ownership to new order mining rights falling under the state custodianship was tantamount to nationalisation, and that signified the implementation of the economic clauses of the Freedom Charter. This conversion was sealed with the promulgation of the Minerals and Petroleum Resources Development Act (MPRDA) in 2002, giving the state massive power to use licenses to drive transformation and to structure relations with the private sector on more productive terms.
However, lodged beneath this benign façade is a quiver of arrows aimed at driving away the private sector from mining in South Africa while asserting the authority of the state writ large over the economy. While harsh on the mining industry, the report reflects very little on the performance of the state in effectively using its licensing authority to drive progressive change in the mining sector.
Yet such an audit would have helped to provide us with a balanced and broader view of institutional failures in the governance of the sector. The ANC study group has thrived in a climate of bogus nationalisation debate by advancing preposterous recommendations on taxation. The nationalisation debate has offered a convenient cover to justify extreme approaches that fall short of expropriation.
There are two propositions in the ANC study that are potentially damaging to the country’s image as an investment destination, and that could undermine development objectives in the long run. The first is the controversial resource-rent tax commonly known as super-profit tax, inspired by Australia’s evolving model.
The ANC report proposes 50% resource-rent tax on what it calls super profits that would kick in when normal profits calculated in terms of Treasury’s Long Bond rate plus 7% are achieved. It is not that a new tax mechanism is inherently bad, but that the rationale informing this tax proposal is not advanced with substance and clarity. Its calculations are best arbitrary.
It is clear that the consequences of these proposals on the investment climate have not been weighed carefully. Curiously, even before the ANC team began its research in earnest, some senior ANC officials had already hinted that a super-profit tax would be imposed so as to discipline mining companies who are supposedly stealing wealth.
Former deputy Minister of Economic Development, Enoch Godongwana, inspired by what he saw in Australia when he visited that country in March 2011, proclaimed that the ANC will move in the direction of super-profit tax. He lamented that ‘they (the private sector) have taken the wealth, they’ve taken the gold, and they’ve taken everything’. This comment raised the ire of Gwede Mantashe, who must have been disappointed that Godongwana had let the cat out of the bag! All that the ANC study team has done is to validate this ideological preference.
One of the powerful lessons to be learnt from Australia’s own experience with super-profit tax is the need for a properly designed tax measure accompanied by a package of incentives and rebates. In Australia, this was preceded by a high level consultation between the state and business. Of course, this was done after serious political damage was already wrought. The initial super-profit tax measure that the then Prime Minister Kevin Rudd sought to ram down the throat of industry, and which the ANC report is enamoured with, led to his downfall. That may not necessarily be the case in South Africa given the ANC’s assured hegemony and the arrogance that comes with it. Such measures would surely cost the country’s global competitiveness, and indirectly jobs.
In its rush to embrace the resource-rent tax, the ANC proposals have not taken into account the fact that mining companies missed out on the 2000 – 2008 commodities boom, largely due to infrastructure deficits, confused policy planning by government, perceptions of political risks and uncertainties related to legislative changes associated with the MPRDA.
The second ambiguity in the ANC report relates to the role and investment strategies of the state mining company, especially in relation to the private sector. According to the report, the state mining company will be exclusively tasked with the development of ‘strategic minerals’, and could then decide which investors to team up with.
These investors could include other state-directed entities from countries such as China and Russia, which could act to compound regulatory opacity in the sector. The role of the state mining company in relation to the private sector is not properly clarified. This is especially important since the state mining company is a corporate entity of the state and falling under a department that both regulates and set policy on the mining sector.
This ambiguity leaves little doubt that the state mining company and its domestic and foreign cronies will be accorded preferential treatment, especially since the final word on the definition of strategic minerals is left to the subjective determination of the Minister and Cabinet.
Apart from the two problematic areas related to resource-rent tax and state mining company, the ANC report does not make any substantive reflection on growing the sector and making it more competitive. One of the exciting developments that can sustain a productive conversation between government and business is the fact that there is massive potential resource base that could yet be exploited beneath the earth.
According to a recent study by Citigroup, at US$2.5 trillion the potential value of South Africa’s resource base exceeds those of countries such as Russia (US$1.6 trillion), Australia (US$1.58 trillion) and Canada (US$1 trillion). Paradoxically, South Africa’s mining sector is among the laggards in terms of the levels of investment it attracts and the growth it generates.
There are better ways to govern the mining industry, to ensure its value is unlocked, to animate its competitiveness, and to harness its potential to contribute more meaningfully towards economic development. Both government and business need to work together in developing a shared vision and a set of objectives that will maximise the potential value of the sector and deploy its capacities to achieve shared prosperity. This requires government to lead from the front in creating a predictable regulatory environment and building healthy relations with business. The mining industry too needs to come out of its comfortable position of merely reacting, but put forward well-thought proposals of what it can do to contribute meaningfully towards shared prosperity.