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Nationalisation

06 June 2012, 08:51

Nationalisation is a sensitive and emotional topic and with our economy (and the world economy) slowing down, it may appear as though handing over the mines and banks to government will lead to a faster equilibrium between black and white people – rich and poor. I understand where the majority of nationalisation supporters are coming from – whites came to their land and stole their riches. I’m sure the form of revenge that Malema so aggressively promotes is exactly what the ANC and Mandela stand for. Not. But to be honest, this majority, just don’t know any better. It’s not their fault; not being educated is part our country’s fundamental problem.

Malema points out that 90% of business is owned by white South Africans. In fact, according to economist Mike Schüssler, white people own 41% of SA’s assets and black people 27%. This is still a shocking figure considering that white people account for less than 10% of the population. However, let’s consider this: in order to run a company, one would need 20 years of education (school & university) as well as another ±15 years working experience. This means, that to efficiently run a company, one needs 35 years – we have only been in democracy for 17 years. We can’t really expect too much more transition than we have? Unless we put uneducated and inexperienced people in the top positions. Nah, not a good idea!
Another fundamental problem is Julius Malema who is preaching economic policy. I’m sorry, but, from which university did Malema attain his docrate in economics?  People can only make decisions based on the knowledge that they have. Unfortunately, the masses are being educated by Malema himself. This is dangerous.

So, I decided to take a (rough) look at the economic impact on South Africa if indeed the ANC decided to nationalise mines.
The cost to purchase the mines, in order to nationalize them, is around R954 221 million which is computed by using all the mining companies’ equity and liabilities (or assets). This cost would amount to roughly 47% of South Africa’s GDP – a big expense albeit a once off expense. To put it into perspective, that's almost 30 times what South Africa spent on the FIFA World Cup. That’s a lot. Considering the world economic climate, I don’t think that the SA government lending the cash to buy out the mines and in turn upping its debt to GDP ratio by 47% is a good idea. The value that government would need to pay, as given above, is a prudent one as there would need to be some sort of premium for control/expropriation.
If the government buys the mines and earns their net profits, there will be an increase in the revenue made by government by an amount of R99 553 million. Whereas mining used to account for 0.52% of GDP, it would now account for 5.22% of GDP – and increase of 4.7%. So far so good.
However:

1) Now that government is running the mines, they would need to make regular fixed asset purchases as a private company would do to maintain the mine and its income generating functionality. This results in a cost of about R74 669 million. 

2) Another interesting fact that I stumbled upon is the opportunity cost of running the mines. Currently, when mines pay their water & electricity costs, it’s an income for government owned companies. Therefore, this voids an income of around R5 390 million. Technically, we could double this amount because government are not earning the income and are providing the service at their own expense.

After the above two ‘expenses’ are taken into account, this will leave government’s revenue from operating mines at R29 994 million. This is a decrease of about R80 000 million which would leave government’s profit from the mines making up about 3.79% of GDP; down 1.43% from the aforementioned 5.22%

Ok, so that’s a lot of numbers. So far, to summarize, nationalizing the mines would lead to an additional amount of R19 494 million which totals roughly 3 times more than what the government collects from taxes now. This is great, let’s nationalize!
No. Let’s not. There are a couple of facts to be considered that are purely qualitative and obviously prove to have a quantitative effect.

The first one is the prospect of government running the mines. Not that any government around the world is particularly good at running a country let alone a company, the ANC has done a pretty sad job with Telkom, Eskom and SAA. These companies are so poorly run that the taxpayer occasionally bails them out (SAA) or they can’t meet consumer demand (Eskom) or the service is just so bad, customers are turned away (Telkom). Do we really want this government running mines? It’s a no brainer that the private sector will always do a better job than government because of a one word motivating factor – profit. It would be completely and utterly unreasonable and irrational to even consider that the government would run the mining companies anywhere near as efficiently and/or as profitable as the private sector.

The second factor to consider is the pace at which foreign investors will leave our country. I don’t think it’s even necessary to quantify the effect on our economy when South Africa decides to become a rogue state and take back land and business. The economy will crumble, the rich will leave to pastures greener and the poor will become poorer – even while owning the mines… Ironic. Zimbabwe ring any bells?

The above two points are not up for debate. Profit motive will always lead to a more efficient machine; and a country (in this day and age) cannot function without foreign investment.

The argument that nationalization will bring equality to our land and a level the playing field, financially, is downright nasty and absurd. In conclusion, if the ANC decides to nationalize the mines, it will have a complete adverse affect on our country leaving the poor in a much worse position. There have to be other initiatives, perhaps raising mining/banking tax; providing skills to the uneducated et cetera. Simply put, we can’t nationalization our country or we will die a quick and painful death. Nationalization is something that looks too good to be true and it is; big time.

References:

http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?sy=2007&ey=2010&scsm=1&ssd=1&sort=country&ds=.&br=1&c=199&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=77&pr.y=0http://www.safrica.info/business/economy/sectors/mining.htm#economyhttp://www.statssa.gov.za/publications/statskeyfindings.asp?PPN=p2001&SCH=4819http://www.statssa.gov.za/publications/statsdownload.asp?ppn=P2041&SCH=4994

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