[miningmx.com] — ON THE first scan, the ANC Study Group on the State
Intervention in the Minerals Sector report seems to assuage the fears of the investor
community with its unequivocal rejection of nationalisation.
The report suggests, for example, that the conversion of old-order mining rights held
under private ownership to new-order mining rights falling under state custodianship
was tantamount to nationalisation, and that fulfils the economic clauses of the
Freedom Charter.
This conversion, sealed with the promulgation of the Minerals and Petroleum
Resources Development Act in 2002, gave the state power to use licences to drive
transformation and to structure relations with the private sector on more productive
terms.
However, lodged beneath this benign facade is a quiver of arrows aimed at driving
the private sector away 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 little about the performance of
the state in effectively using its licensing authority. Yet such an audit would have
helped to provide us with a balanced and broader view of the failures and
opportunities in the sector.
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, which 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 the rationale informing this
tax proposal is not advanced with substance and clarity. Its calculations are at best
arbitrary. It is clear that the consequences of these proposals on the investment
climate have not been weighed up 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 were supposedly stealing wealth.
Study group chairperson Enoch Godongwana, inspired by what he saw in Australia
when he visited that country in March last year, proclaimed that the ANC would
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 letting the cat out of the bag disappointed and angered Gwede Mantashe,
because it suggested that the ANC study team had simply sought to validate its
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 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 to 2008 commodities
boom – largely due to infrastructure deficits, confused policy planning by Government
and uncertainties related to legislative changes associated with the Minerals and
Petroleum Resources Development Act.
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 falls under a department that both regulates and sets 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 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 $2.5 trillion (about R19 trillion) the
potential value of South Africa’s resource base exceeds those of countries such as
Russia ($1.6 trillion), Australia ($1.58 trillion) and Canada ($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.
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 and put forward well-considered proposals of what it can do to
contribute meaningfully towards shared prosperity.
– City Press
