Mine seizures not a given
Because of the range of bilateral investment treaties South Africa has signed.
Aside from the prohibitive cost of paying out foreign investors should assets be expropriated, they are still protected for at least a decade, even if a treaty is cancelled, according to experts.
“Strategic nationalisation” where appropriate on a “balance of evidence” appears to be what the ANC has settled on, despite a lack of clarity in the outcomes of the conference.
This is according to a final draft version of the report of the economic transformation commissions that the Mail & Guardian has seen.
It was in line with the position taken by the ANC after its 1992 policy conference, said a delegate who attended that conference. Nationalisation was a policy option for the ANC, he said, but it had to be accompanied by a proper understanding of the economic implications.
The notion of “wholesale nationalisation” is off the table. The report, which will feed into the final policy positions taken at the ANC’s Mangaung conference, also recommends a greater role for the state-owned mining company, more beneficiation, including instruments such as targeted export taxes to support this aim, and efforts to ensure the competitive pricing of key resource inputs.
The discussion document on state interventions in the minerals sector, which was drawn up ahead of the policy conference, appears to have been broadly supported.
But specific fiscal interventions, such as a resource-rent tax, have been omitted from the resolutions document. Instead, it references the need for the state to capture a share of mineral resource-rent taxes but has little discussion of how it could be achieved.
The draft report calls for bold forms of intervention in the economy such as “state ownership, including more strategic use of existing stated-owned companies, as well as strategic nationalisation where deemed appropriate on the balance of evidence”.
Under the minerals sector it calls for a focus on greater beneficiation and the strengthening of the state mining company by consolidating state mining assets into a single institution. “This state mining company will expand or contract, depending on the balance of evidence, including by partnering with the private sector in strategic mining ventures,” it states.
The state also has to “capture an equitable share of mineral resource rents and deploy them in the interests of long-term economic growth, development and transformation”.
It calls on the state to develop strategies “to identify and manage strategic minerals in the national interest. Instruments to support beneficiation and competitive pricing of these strategic resources include the use of targeted export taxes.”
Coal is highlighted and the document stresses the need to “increase the supply of coal at competitive prices with the aim of containing energy costs”.
In the area of industrialisation and infrastructure development, it argues for “the competitive pricing of key resource inputs to downstream beneficiation activities, including measures to address import parity pricing”.
The M&G reported last week that proposals for strategic state intervention included the granting of a possible 30% share of all new mining projects to the state. The details are still to be discussed, but there are indications that it is intended to be considered on a case-by-case basis.
More details will be provided in discussions of the national executive committee – expected later this month – and the ANC economic transformation committee, according to a source who took part in the talks.
The report indicates that the economic transformation committee must co-ordinate “further participation of ANC provinces, alliance partners and the leagues in a process of engagement leading to Mangaung”.
The resolutions make no mention of specific companies. However, the state has expressed concerns over steel prices and access to affordable iron ore supplies and an intention to clamp down on sectors with anti-competitive pricing practices. What form specific interventions in these sectors could take is unclear.
The practicalities of straightforward nationalisation of these assets were just “impossible”, said the source. Many of South Africa’s largest companies, including ArcelorMittal and Kumba’s parent, Anglo American, are listed in other countries and protected by bilateral investment treaties.
The fine print
Bilateral investment treaties with member countries of the Organisation for Economic Co-operation and Development had a relatively standard format and allowed for nationalisation on condition that it is nondiscriminatory, in the public interest and compensation is provided to investors at full market value, said Peter Leon, head of Africa mining and energy at law firm Webber Wentzel. Under these treaties, which require South Africa to maintain a stable and predictable environment for investment, investors can also claim damages for unfair and inequitable treatment.
The fact that proposals such as a resource-rent tax appeared to have been “kicked into touch” was a positive development said Leon.
The lack of clarity on other proposals such as the strategic nationalisation in particular sectors, a greater role for the state-owned mining company and the state possibly receiving a “free-carried” interest in all new mining projects, is problematic.
A targeted takeover of any mining assets or companies in sectors deemed strategic would require immediate and full compensation to investors.
“The cost would simply be enormous,” Leon said.
Conflicts of interest
There is also a concern that conflicts of interest could arise between the state mining company, which would in future be owned by the department of mineral resources. The same department would remain responsible for awarding mining licences and regulating the industry, unless the proposed minerals commission is established.
Although the fiscal proposals appear to have taken a back seat, the uncertainty over a range of other issues is negative for the industry and investor sentiment. “Although it gives the industry five more months to negotiate [ahead of Mangaung], this also means five more months of uncertainty,” Leon said.
The government has started to review South Africa’s regime of bilateral investment treaties, particularly the first generation of treaties that were concluded after 1994. Discussions began as far back as 2007, predating the current nationalisation debate. After a set of recommendations was put to the Cabinet, it took a decision in 2010 that indicated its intent to terminate these first-generation treaties and provide trading partners with the opportunity to renegotiate them on the basis of a new model.
All decisions in terms of treaties are now subject to oversight by an interministerial committee convened by Trade and Industry Minister Rob Davies that includes ministers for economic development, agriculture, finance and international relations.
Bilateral investment treaties generally have a shelf life of between 10 and 15 years and those concluded in the late 1990s are up for renegotiation, according to Xavier Carim, deputy director general for international trade and economic development.
He said there was a “widely held and growing sense” that these early bilateral treaties were no longer appropriate to ensure balance and predictable investor protection, as well as the right of governments to regulate in the public interest.
There is concern that these treaties do not take into account a range of public policy objectives that governments might want to pursue, including the protection of the environment.
The legal provisions found in the standard model of these earlier treaties have also been broadly and imprecisely drafted. As a result, a great deal of unpredictability and uncertainty is now experienced in in international arbitration processes.
Although the government had raised these concerns in various international forums, Carim said, formal discussions to terminate these bilateral treaties and renegotiation processes had not yet started.
Depending on the agreement in question, the investments made while it was in effect are still protected for at least 10 years.
Leon said that, for example, investments made under the United Kingdom treaty and most Organisation for Economic Co-operation and Development-model treaties continued to be protected for 20 years following their termination.
“In other words, if South Africa terminated the UK treaty with effect from July 2012, all UK investments in South Africa would remain protected until July 2032.”
What about empowerment?
The impact of a more active state on black economic empowerment efforts also needs to be addressed.
Sandile Zungu, leader of the Black Business Council, said it was clear that the ANC wanted greater state involvement in the economy. It would be welcomed in areas in which the private sector had exhibited inertia, but he warned that the state needed to have valid reasons for why it was targeting a specific sector or mineral and that its policy had to be transparent and provide certainty.
The ANC also needs to clarify what it means by “strategic nationalisation”. This includes clarifying whether it is a question of a phased approach to nationalising everything, whether specific assets or resources are being targeted, or whether the proposal is aimed at specific companies.
Zungu said empowerment partners had not in the past received a “free-carried interest” in black economic empowerment transactions. Instead, they ranked behind those that had funded the development of a project but remained full equity participants.
He questioned what the addition of a state share would mean. “Assuming the state was to get 30% and empowerment partners 26%, only 44% remained for other capital providers,” he said.
This can make investment in the local minerals sector unappealing. “We hope that state participation will not come at the expense of empowerment,” Zungu said.