Tax talk to dominate Mangaung mines debate

[] – THE full-scale nationalisation of mines is off the table and not regarded as ANC policy, but the ruling party is considering a new tax regime that could be as injurious to the mining industry and investment as nationalisation.

This is the view of analysts ahead of the ANC’s 53rd national elective conference in Mangaung.

Besides electing a new leadership, 4,500 ANC delegates will from 16 to 20 December discuss and debate issues, such as organisational renewal, economic transformation and the future of mining in South Africa.

Proposals for greater state control of the mining industry contained in a discussion document, titled State Intervention in the Mining Industry (SIMS), especially have investors and the private sector jittery. The proposals include measures to ensure the supply of minerals for domestic manufacturing by taxing unbeneficiated mineral exports and imposing a resource rent tax on all mining activities.

City Press earlier reported that private sector companies were trying to persuade the ANC not to add additional taxes and control the price of mineral inputs, but it’s unlikely that the ANC will reject plans for greater intervention in the mining sector.

One of the biggest considerations for state intervention in the mining industry is to ensure affordable coal supply to Eskom for its coal-fired power plants.

“Yes, South Africa has a problem with affordable coal supply,’ Andile Sangqu, executive director of Xstrata South Africa and a member of the Chamber of Mines’ executive council, says.

“But to control the price of any of our minerals is not the solution.’ Instead government, coal producers and Eskom need to sit around the table and work out a model for the country as far as pricing for coal is concerned.

“The ANC has very deftly instrumentalised the nationalisation scarecrow to advance its developmental state programme, at once reassuring investors that there will be no expropriation,’ Claude Baissac, political risk analyst at Eunomix, says. The ANC’s goal is to make mining the centre of the economy by ensuring coal supply to Eskom, to reconfigure the ownership structure and to make South Africa a large-scale steel producer, Baissac adds.

“There is nothing inherently wrong with this, but in practice it has more often failed than not.’ According to him, it is a “huge and costly bet, reminiscent of industrial policies of the 1960s and 1970s’ in the developing world. “We know the consequences of those policies – declining production and the 1980s debt crises of Africa and Latin America.’

The ANC also appears immovable on the issue of taxing unbeneficiated mineral exports. It’s a proposal that could be advantageous to the country, provided it is not a “blanket taxation’ of all minerals across the board, Xstrata’s Sangcu says.

“We are in favour of beneficiation of chrome as it will help to create jobs and shield us against competition from China where labour is cheap,’ he says. “But beneficiation tax should be considered commodity by commodity.’

According to Baissac, taxation is a “blunt double-edged instrument’ – whether it’s in the form of incentives or added taxes to encourage certain economic behaviours.

“Badly implemented incentives allow uncompetitive sectors to continue to operate longer than they should,’ he says. Similarly, punitive taxes distort and decrease comparative advantage and discourage investment.

“Why would South Africa, a country ravaged by low employment and the accompanying social cost, want to discourage investment in a competitive industry?’

He doubts South Africa has the comparative advantage to beneficiate at the expense of mineral exports. “Our wage inflation, constrained electricity supply and fast rising electricity prices suggest otherwise. The risk is very significant that this [beneficiation] policy will collide with others and lead to a significant decline in production – already a problem given the current pressures on commodity prices and demand, and on input costs and supply – without leading to a commensurate increase in beneficiation.’

In the discussion document, a resource rent tax of 50% on all mining activities is also proposed. It is suggested that this kind of tax will only kick in after a company has returned a normal return on investment. The ANC expects that resource rent taxes would yield R40bn at current mineral prices.

Sangcu is against such a tax imposition. “South Africa as a mining destination is over-taxed already,’ he says. “On top of the normal corporate tax and the royalty taxes mining companies are responsible for government now wants to impose an additional contribution. There is not space for an additional tax and it would have negative long term consequences for the industry.’

“It is not only legitimate, but essential for development, to share the mineral rent effectively, to ensure that the proceed of non-renewable resources are leveraged for the common good,” Baissac says.

“A resource rent tax is meant to help achieve this, provided it is set at a non-punitive level. And provided the proceeds are utilised to foster social development and economic diversification. In the current environment, where market uncertainty is leading the industry toward consolidation, one must question whether SA is not coming too late in debate. .’