/ 2 December 2011

Nationalism, not nationalisation


If I were a betting person, which I’m not, I would say that the centrepiece of the ANC’s approach to managing the mineral resources of the country will be a resource rent tax (RRT). A research committee investigating the role of the state in the management of the country’s mineral resources has completed its study but, according to ANC secretary general Gwede Mantashe, the report has been sent back to the authors to ensure that it is written in accessible language.

The research is in response to calls for the nationalisation of the mines by ANC Youth League revolutionary-turned-cattle-farmer Julius Malema. The committee has studied best practice in 13 countries. Its report has yet to be made public but the outlines of its content have begun to emerge.

At the least, it will seek a more activist role for the state in the management of the country’s $2.5-trillion of unmined resources. This continues to be cast as nationalisation but, more accurately, can be thought of as nationalism: the question is how the state can ensure that the country extracts the maximum benefit from its resource base.

Two of the heaviest hitters in the commodities market, Ivan Glasenberg of Glencore and Tom Albanese of Rio Tinto, with combined annual global revenues of $240-billion last year, have in recent months singled out resource nationalism as a key potential risk to their businesses.

My understanding is that a key finding by the ANC’s research team is that state intervention in the minerals sector internationally is the norm rather than the exception. This will no doubt challenge conventional market-based theory that holds that the state should limit its role to providing infrastructure and good governance such as in the issuing of mining licences.

You have to note that the ANC-run government has not covered itself in glory on this point. It reformed the old system in which “big mining” grabbed as many of these rights as possible and then, in some cases, sat on them as though they were a God-given right.

But the new system has suffered from a lack of transparency and has, apparently, such as is the case in the Kumba/ArcelorMittal deal, been used to take a nice chunk of the Sishen iron-ore mine and transfer it to the first family and its cronies.

The RRT is best known as a controversial tax that former Australian prime minister Kevin Rudd wanted to introduce. It led to his undoing, but his successor, Julia Gillard, has recently passed the tax into law, albeit at a much lower tax rate than that envisaged by Rudd. The Australians intend using the RRT’s proceeds, about R88-billion over four years, to build new infrastructure and cut taxes on higher value-added, job-creating secondary industries.

The idea is that this will help to combat the continuing deindustralisation of the Australian economy and help prepare the economy for the days when natural resources have been depleted. The fact that BHP Billiton earlier this year posted a record profit of $24-billion on revenue of $71-billion and taxes of $7-billion no doubt helped the passage of the bill.

The RRT is an additional tax imposed on profit over and above all other taxes. As such, it is a kind of a windfall tax. These are much better known. The United Kingdom, for instance, has had such a tax on the North Sea gasfields.

Many oil-producing countries have similar taxes, the authorities sometimes taking the lion’s share of profit in taxes. Ghana this week announced a windfall tax on minerals, saying it was part of a move to equalise taxes on mining and oil companies. The tax, which Bloomberg reported is supported by the International Monetary Fund, will be set at 10% of profit after company tax, which has recently been raised from 25% to 35%.

“Ghana, Africa’s second-biggest gold producer, will set up a publicly traded company to manage the country’s revenue from the precious metal, including profit from a planned windfall tax and higher corporate tariffs,” Bloomberg reported.

“The Ghana Gold company will be majority owned by the West African nation’s government and will list shares on the Ghana Stock Exchange,” Newman Kusi, an adviser to Finance Minister Kwabena Duffuor, told Bloomberg.

It is understood that the International Monetary Fund is supportive of resource taxes if they are well designed and do not operate as a disincentive to investment. It supported Australian initiatives to implement its resource tax and is likely to take an interest in moves by South Africa to introduce such a tax here.

A high-profile supporter of resource taxes is Nobel laureate Joseph Stiglitz, who last year said Australian miners had been too influential in shaping the debate about resource taxes.

‘”The natural resources belong to the people,” he said. “You need to have a well-designed competitive auction to have different companies compete so that companies get the necessary returns to do the investment, but the surplus goes to the Australian people,” Stiglitz said, as reported by The Age.

Documents published on the ANC’s website, including that by Paul Jordaan, a researcher on the panel investigating economic options for the state, have suggested that resource taxes can realise most if not all of the outcomes listed by pro-nationalisation pundits, including increased revenue for the fiscus and greater equity from the proceeds of scarce resources, without exposing the economy to the great risks nationalisation would bring.

Also apparently mooted in the yet-to-be-released ANC’s economic policy documents are export taxes on some minerals, which could be used to incentivise the local beneficiation of minerals. The idea would be to attract industries to source their inputs domestically at the lower local price.

Word is that the ANC’s research indicates that as much as R40-billion could be realised annually from a RRT, that is about 40% of the current R104-billion budget deficit. There is debate about whether local miners would be able to pass on higher taxes to end users, but some of our smartest economists see this in simple terms: we give away our minerals too cheaply, exchanging a declining resource for oil and other imports that we use to fuel our lifestyles.

In an ideal world, we would earn more for our resources, at least while the commodity boom fuelled by the rapid growth of China and India continues, perhaps even sufficient to run a trade surplus rather than a deficit.

In this scenario, we could move from being a debtor nation to a creditor one, with cheaper money as there would be less need to keep rates high to attract foreign money. The counter argument, though, is that, should the state get its intervention wrong and mess up key prices, it could put the economy at significant risk.

The fact that our parastatals have been poor performers adds weight to this argument. If you cannot run utilities in transport, energy and tele-communications, are you really up for interventionist strategies to raise mineral prices?

Another argument against resource taxes is that the state can get used to the windfalls and will not spend these revenues wisely and sustainably. The counter argument to this, as noted by the Australians, is that the benefits should accrue not to the fiscus but to a stabilisation fund, which then smooths out the dividend flow to the state.

It is understood that the ANC proposals favour establishing a sovereign fund from some of the proceeds, the idea being that these funds are invested offshore to help keep the currency competitive. One of the economic risks is that the state has been unwilling to bring in the private sector to help develop infrastructure. We are yet to hear how the proceeds of possible windfall taxes will be used but, if it means a bigger state with more money to spend rather than lower taxes on jobcreating businesses, we could end up back at square one.