Nationalising Mines Essay About Myself

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Abstract

Nationalisation is high on the policy agenda in South Africa. This paper considers the case for nationalising the local mining sector from an evidence-based perspective. The relevant evidence is derived from theoretical considerations and related to the known features of the South African mining sector and economy. A strong case against nationalisation emerges, which can be summarised as follows: The mining sector is competitive and therefore a poor candidate for public ownership. Further, the resources sector does not dominate the South African economy nor does it create the risk of Dutch Disease. Nationalising the mining sector will cost the government more than it receives. This is not only a bad idea in itself, but it will limit the scope for distributive policies on the national budget. The contemporary international experience demonstrates the risks of fiscal imprudence. Finally, nationalising the resources sector will undermine support for those very market-based institutions required to achieve a higher long-run growth trajectory.

Suggested Citation

  • Stan du Plessis, 2011. "Nationalising South African mines: Back to a prosperous future, or down a rabbit hole?," Working Papers 17/2011, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers145

    Listed:
    • Stan du Plessis

      () (Department of Economics, University of Stellenbosch)

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    KwaZulu-Natal Treasury economist Clive Coetzee has waded into the 
debate on mine nationalisation, warning that such a move would result in the collapse of South Africa’s economy.

    In his assessment of the African National Congress Youth League’s (ANCYL’s) proposal for the nationalisation of mines, due to be discussed at the ANC’s national general council, at the end of the month, in Durban, he says the mining industry supports the four macroeconomic goals of economic growth, 
employment, a low inflation rate and a 
balance of payments surplus.

    “Nationalisation of the mines would 
increase unemployment, poverty and inequality, and government would not be able to react to the free-falling domestic economy,” he says.

    The ANCYL’s radical proposal recommends that 60% of any new mining activity 
and 50% of any existing mines should be owned by the State.

    The ANC leadership has repeatedly 
reiterated that nationalisation is not part of its 
policy, but a change of leadership could result in a new policy direction.

    The Chamber of Mines declined to comment because the proposal is still at the policy debate stage and the Chamber only engages with government when an issue reaches the level of policy status.

    However, according to the Chamber’s website, the mining industry directly accounted for 8% of gross domestic product (GDP) in 2008, although the indirect multiplier effects raised the contribution to about 18%. The 
industry’s contribution to GDP declined by 6,5% in 2008, mainly because of the 7% 
decline in mining production.

    The mining industry also accounted for 9% of total fixed investment in the economy and for 13,3% of total private-sector investment. The Chamber said that if the multiplier effect was taken into account, mining helped generate 18% of total investment in the economy.

    The industry continued to act as a magnet for investment in South Africa, according to the Chamber. At the end of December 2008, the mining sector had accounted for R1,4-trillion, or 31%, of the value of the JSE.

    The mining sector also paid R32-billion in direct taxes and a substantial portion of indirect taxes, accounting for 17,3% of total company tax, compared with the R25-billion paid to investors in the form of dividends.

    In terms of merchandise exports, mining directly contributed about R218,8-billion, or 31%, of the total. If beneficiated minerals 
are added to primary minerals, the sector 
accounted for over 50% of merchandise exports.

    With 518 585 employees in 2008, mining 
accounted for 6,1% of total nonagricultural formal employment.

    Taking into account the indirect effects of mining, an additional 500 000 jobs are estimated to exist.

    According to the website, in 2008, about R66,7-billion was paid in wages and benefits to mine employees, accounting for about 6% of the total compensation paid to all formally employed people in South Africa.

    For the period under review, mining 
accounted for 9% of total fixed investment in the economy and 13,3% of total private-sector investment.

    Coetzee points out that the economics of the mining sector indicate that it is a significant and important industry, contributing significantly to the health and performance of the national economy.

    “However, it is a very risky industry beset by environmental, political and labour challenges,” he says.

    Coetzee maintains that government cannot be better at mining than the private sector, as it operates on a system of incentives and 
international competition.

    “The private sector has also built up significant human resource capacity and intellectual 
capital,” he says.

    He points out that the league’s proposal is motivated and argued on ideological rather 
than economic grounds and that many 
ex-socialist countries have converted to a more free market system because of the challenges 
they faced.

    Production costs in the mining industry have risen significantly and Coetzee points out that the cost of sales increased from R33-billion to R103-billion over a fairly short period.

    “Total expenditure accounts for about 80% of total turnover, suggesting fairly low profit margins,” he says.

    Output is also under severe pressure, affected 
by scarcity, falling ore grades, lack of investment and increased labour costs.

    Director of the Free Market Foundation Eustace Davie said that lack of investment by government had been one of the main complaints of British companies that had been nationalised and then reprivatised and 
recapitalised.

    “That is understandable, considering the type of investment decisions faced by governments, such as choosing between building a new hospital and digging a new shaft,” he said.

    As a result, productivity and efficiency drop and profitability declines as governments have to function according to bureaucratic rules.

    Coetzee noted that bureaucrats typically perform poorly in business, not because they are incompetent, but because they face contradictory goals and perverse incentives that can distract and discourage even very able and dedicated public servants.

    Davie said private companies also had to face the hard fact that, in their risk/reward 
decisions, losses would be accrued if they made a mistake and they could be forced to close down – a risk not shared by government.

    The impact, over time, would be that jobs would be lost or taxpayers would have to subsidise the mines, which would lose money.

    He pointed out that the Mexican government had even managed to lose money on oil, while everyone else was making a huge profit. 
Meanwhile, in the UK, unprofitable coal mines were kept going at the expense of taxpayers.

    In Zambia, copper production fell from a high of 720 000 t in 1969 to a low of 260 000 t 
in 1999 following nationalisation, which 
resulted in a loss of investment in the sector.

    In Botswana, which is generally held up as a model of successful nationalisation, Coetzee points out, the mining industry was developed in cooperation with De Beers Consolidated Mines.

    “The success of Botswana and its mining industry seems to be associated with private ownership and investment,” says Coetzee. “Nationalisation or the desire to own or manage mines has never been part of the Botswana policy or strategy.

    “However, active equity participation by government is the norm and important from a government revenue point of view. The participation of the government is, however, done in such a manner that it does not discourage private-sector ownership and investment.”

    Coetzee notes that the loss to the host country because of nationalisation includes not only future investments by foreign firms, but also loss of skilled labour supplied by the foreign investor and loss of export markets.

    “In South Africa, State-owned enterprises (SoEs) have generally been economically 
unsuccessful and have high levels of borrowing, which raise the overall level of the borrowing requirement in the public sector. This results directly in high interest payments that affect the profitability of SoEs and their 
capacity to grasp development opportunities.

    “State-owned diamond miner Alexkor has suffered major losses and the company’s contribution to government revenue and cash flow has been minimal, if not a drain. It has also had no, or very little, impact on poverty and inequality.”

    Davie said that, for the good of everyone, especially the poor, the mines should remain in private hands.

    Edited by: Martin Zhuwakinyu
    Creamer Media Senior Deputy Editor

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