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Should South Africa nationalise its mining industry?

28 April 2014, 11:56

Mine Nationalisation – Should South Africa Nationalise its Mining Industry?

BRIEF INTRO

The nationalisation of natural resources has always been a muddy area for any nation’s economic and political waters; mostly because it lacks the clarity of certainty. This area may be considered a pivotal factor for any nation’s economic future, political landscape, and its relations with neighbouring, allied, and direct trading nations. In this article; we’ll take a look at:

1. What nationalisation is; the terminology you need to understand and the consequences you need to heed,

2. The nationalisation of natural resources in varied countries in the world,

3. The varied nationalisation methods, supplemented with what they mean for the economic health of South Africa

4. The Conclusion - our analysis and decision on the matter (should SA nationalise?).

Alright then, get the tea ready and let’s dive in.

WHAT IS NATIONALISATION?

Nationalisation is the act of taking private assets or industries into public ownership by a national government or state [1][2]. Let’s try and get a less text book definition shall we: nationalisation is when a nation decides to buy or get more control, and thus ownership of one or more of its major industries (or resources) from the companies involved. Each government has a choice on which industries or assets to nationalise, however; the natural resources, banking, energy, transport, land and agricultural industries have proven quite popular in the history of nationalisation [2][4]. This nationalisation, could be the taking of assets owned by a private entity (company/corporation) or owned by the lower levels of a national government’s structure; like the provincial government or the municipality[2][4].

The following terms are of particular importance in this article:

• Expropriation – the taking of private property/assets by the national government for the ‘greater benefit’ of the public. This process usually accompanies a suitable compensation by the government to the parties (usually foreign companies) involved [2][3]

• Privatisation – the transfer of the ownership of an entity (property/business) from the government to a privately owned enterprise [2].

• Socialism – when a society is organised in a way that government owns and controls all or most of the major industries and/or resources, more so than any individuals and companies [2].

• GDP (Gross Domestic Product) – The total monetarial value of all goods and services produced by a country in a given period of time (usually annually) [2].

NATURAL RESOURCES NATIONALISATION NATIONS AND THEIR STORIES

BOLIVIA - NATURAL GAS

Beautiful Bolivia has had bitter run-ins with nationalisation before the recent one with natural gas; once with the tin industry in the 1950s, again with the hydrocarbon industry in 1937, and the infamous continuation of the hydrocarbon saga in 1969[4][5]. Despite these burned fingers, the formidable President Evo Morales went for another meet with nationalisation; a fulfillment of promises made during election campaigns about the country’s natural gas industry [4]. Morales’ approach wasn’t without theatrics though; he seized control of the various natural gas private corporations using the military (1st of May 2005), and then offered the foreign private corporations, six months to renegotiate their contracts or vacate the country [4][5]. Needless to say, the main companies involved sounded a loud cry, backed by their countries and a few cases of hostility. Petrobras, the Brazillian state-owned company, was amongst the most affected; because it was one of the biggest foreign investors in Bolivia, with a 14% control of the country’s natural gas industry[5] [6]. France’s Total, UK’s BG Group Plc, and Spain's Repsol YPF were also amongst four of the most affected in the 53 companies called for nationalisation [6]. This nationalisation was without expropriation or confiscation of the industry; the government was only seeking to raise its share of the two biggest gas fields’ revenues from 50% to 82% and only 60% on the remaining small fields [5][6][7]. This increment in the revenue shares meant that the country’s oil related revenues got a significant boost from $320 million to $720 million annually [5][6][7]. As a direct result; the export gas price went higher, Bolivia enjoyed a sustained economic growth for a while, and Morales was re-elected for a second term; a position he’d occupy for almost two decades[5][6][7].

BRITAIN – COAL

British nationalisation was born of Clement Atlee in 1946, but the coal industry was only nationalised in 1947 with little resistance as it was unprofitable [8]. On the first of January, 1947; a statutory body was setup to oversee the industry; aptly named the National Coal Board (NCB), and later referred to as the British Coal Corporation [8][9]. The coal industry was nationalised through expropriation, and the 200 collieries were bought at £338 million, which is said to be worth £11.5 billion in 2012 money by heads with scholar hats. The nationalisation had some advantages for the miners; like sick paydays, paid holidays, the safety standards improved, and there were rest homes for miners recovering from accidents [9]. But the miners pay was still not increased as promised during the initial nationalisation campaigns; the cry that birthed big strikes in 1972 and 1974 [8][9]. As the years aged, the NCB closed off a lot of mine pits and a lot of jobs were lost as a result, especially after the 1984 – 1985 strikes [8][9]. Eventually the British coal industry privatized its economic assets and there was collaboration with big houses like RJB Mining in the formation of the UK Coal Plc, a decision that was sometimes deemed late, because by then; there were only 15 pits left, and the jobs as well as the industry had dwindled to great proportions[8][9].

CHILE – COPPER

The ‘Chileanisation Of Copper’, as it’s commonly referred to; was the nationalisation of the Chilean copper industry in the 1950s by way of expropriation [10][14]. This was the seizing of the three biggest mines in the country, widely referred to as ‘La Gran Mineria’ together with three smaller mines under the Presidency of Carlos Ibáñez del Campo[11][14[15]. The process only came to completion during President Salvador Allende’s term in 1971, with the Chilean government refusing to compensate the then owners of Chuquicamata, El Salvador and El Teniente mines (the biggest mines at the time); after citing some alleged excessive profit reaping by the owners[12][13][14]. The other smaller private properties were compensated, but timidly; events that lead to the United States of America issuing caution bathed statements that fell to tired ears: “This serious infraction to international practice can cause damage not only to Chile, but to all other developing countries”. In retrospect, some timid souls might argue that the Chilean’s should have exercised a little caution in their dealings with the Americans, because the events that followed were something out of a conspiracy movie. Although President Nixon (US) denied any involvement; the CIA was linked to numerous plots against Allende’s government. Allegations that included monetary and covert operations aimed at pressurizing congress and the public to oust Allende as the president. Regardless of the CIA’s involvement, Chile was plagued with massive public strikes, of note was the protest of the wives of Allende’s General’s in front of his house, the 100 000 women strike in protest of rising prices and shortages of food and fuel, the 24 day strike, and the opposition parties’ cries about the government’s long standing disregard for the constitution. The following governments were a little pro-America and pro-privatization but Chile never denationalized its copper industry, although it now has a foreign investor encouraging policy.

ZAMBIA – COPPER AND OTHER MINERALS

The 10th of August 1969 was perhaps one of the most pivotal days in Zambian history; a tale of a country’s search for sovereignty and the red eye of the IMF [16][17]. President Kenneth Kaunda and his government declared the nationalisation of the country’s copper industry; the strategic action birthed to accompany others of its sort in the building of a socialist state [18][19]. At the time, the mining of copper contributed 50% to the country’s revenue; nationalizing it could afford the government the revenues needed in the reduction of food prices and other basic commodities [18]. But lo and behold, the Zambian socialist policies were unable to improve the economy and when the seventies came carrying collapsing copper prices; the Zambian economy pointed its nose into a dive [17][19]. Following these events, the government had to borrow money from the IMF in a quest to decrease basic food prices, but with a continuation of this trend; the IMF began pressurising the Zambian government to reconsider its economic structures by abandoning socialist economic policies [18][19]. The 1980s saw Zambia becoming one of the most indebted countries in the world, the situation that forced President Kaunda to partially privatise because the pressure from within and without Zambia was barometer defying [17][19]. This couldn’t keep him in office though, and he lost his seat to Frederick Chiluba in the 1991 elections [19]. Chiluba’s government was a supporter of liberal reform and began privatizing the major sectors of the economy; the move that lead to some consecutive years of economic growth; averaging 5.5% a year since 2003 [19]. In 2010; Mining weekly told of Zambia’s biggest copper output since 1973, the tale that rings true even today [19].

NATIONALISATION AND THE ECONOMICAL HEALTH OF SOUTH AFRICA

The beauty of time is its echo, the opportunity to look back into yesterday and gaze at the lessons. Whilst studying the events that led to the decision to nationalise natural resources, two distinct reasons emerged as the fueling spark. We looked at the cases and the events of Arabia, Argentina, Bolivia, Britain, Chile, Cuba, Czechoslovakia, India, Iran, Italy, Kuwait, Libya, Mexico, Nigeria, Pakistan, Poland, Russia, Saudi Arabia, Sri Lanka, Sweden, Tanzania, Venezuela, and Zambia. Those two distinct reasons that seemed to stand out were:

1. A nation looking to attain a higher share of the industry’s revenue, and/or a more demanding tax percentage from the privatised corporations. This could be stemming from a need to better its citizen’s livelihoods, retain or up-heave its country’s sovereignty, or just establish higher ground in its country. Bolivia could be an example of this, please see above.

2. a nation concerned about rescuing a failing privatised industry. The peril of private companies taking large amounts of profit out of the country and not doing enough to sustain the industry or the country, and as a result; a decrement in jobs, the quality of jobs, the safe working conditions, the development of local skills, and the fall of the industry as a whole. Britain coal could be an example of such, please see above


South Africa is a developing country and does not yet possess the funds needed to purchase, expropriate or maintain its towering trillion dollar mining industry[19][20]. As such, the only choice, if nationalisation is to be implemented is the first option above: to demand a higher share on the industry’s revenue or tax percentages. But before you put the tea down and go for demonstrations in the street, let us take a much closer look at the industry and what it means to the country’s financial health.

Looking at the 2012/2013 industry approximations; South Africa’s mineral reserves are estimated at $2.5 trillion, it has the largest manganese and platinum group metals, and sits atop the largest reserves of Gold, Diamond, Chromite Ore, and Vanadium [19][20]. The industry’s contribution to the country’s GDP has declined within the past two decades, but it still accounts for 18% (8% direct and 10% indirect) of the GDP [19][20]. The sector creates a million jobs (500 000 directly and 500 000 indirectly), earns 50% of foreign exchange, accounts for R78 billion in salaries and wages; 94% of electricity, R407 billion in local expenditure, 20% of investments, and R1.9 trillion in foreign savings [19][21]. Simply put; an unstable or declining mining industry is a declining economy and a falling South Africa; simply put, South Africa needs its mining industry!

ISSUES TO CONSIDER

FOREIGN INVESTORS

The industry is 50% of the nation’s foreign exchange, brings in 20% worth of investments, and R1.9 trillion in foreign savings [19]; as such, the issue of scaring off foreign investors is of well-deserved importance. If nationalisation were to take effect, history tells us that the investor’s feet would grow cold and some might even start running to China or other less regulated regions [21][22]. But history has also shown that investors do come back eventually [21][22][23]; the question then is: has South Africa initiated policies that would still deem it an attractive investor zone even after nationalisation? Or better yet; Is South Africa ready to withstand the potential storm of rising food prices, higher unemployment, and weakening relations with trading partners, due to arise from a decline in investor’s numbers?

THE SKILLED LABOUR EMIGRATION

Despite the low rankings of the South African education system [28][29], skilled members of the nation’s work force have proven quite attractive beyond international waters [23][24][25]. It is estimated that approximately 1.6 million of the country’s skilled, managerial, and professional work force has emigrated to quite waters since 1994; the reports say that for every one of the skilled living the country, 10 of the remaining unskilled workers lose their jobs [24][25][26]. This is said to be a direct consequence of the managers, the skilled, or the professionals leaving with their departments on their shoulders [24][25][26]. The issue here is that during the instability of nationalisation, many of the skilled would rather take off-shore jobs than face the possibility of unemployment, the reduction of salaries benefits, or any other uncertainty lurking in the dark. Countries like the USA, UK, New Zealand, Australia, and Canada all have very high demands for skilled labourers; and they have accounted for about 75% of the recent skilled worker emigration [24][25][26]. Besides the loss of a much needed skilled workforce, another problem is the loss of return from investments into skilling a workforce, for instance; the medical sector lost close to $1.41bn of its investment, whilst the UK gained $2.7bn from the emigration: tales of wrought hearts [25][26].

THE OPPORTUNITY TO BE INDEPENDENT

Despite the seemingly daunting transition; nationalisation does offer the country an opportunity to stand on its own, and learn just how capable it can be. A chance at absolute but vulnerable sovereignty: a chance at tasting the curse or the blessing.

A CHANCE TO BETTER THE LIVES OF THE CITIZENS

Some instances of nationalisation like Chile/Bolivia/Poland do showcase a better life for the citizens. Better returns on the country's resources did afford them lower food prices, better wages, safer working conditions, a chance at growing the country's managerial pool, and a little sense of pride at holding their future in their hands. This did require a lot of strife and planning though; something to consider if South Africa is to follow suit.

We’ve considered some cases of nationalisation, the risks, the impacts on a country’s economic health, and the approaches that worked and failed; and we’ve come to these conclusions:

1. As a developing country, South Africa is not yet able to purchase, expropriate or maintain its massive mining industry. As such the only way to nationalise would be to demand higher shares on the mining industry’s revenue or set higher tax on the private entities. South Africa’s situation resembles that of Bolivia or Chile; they had the resources but not the money to buy out the industry. As a result they decided to increase their share on the industry’s revenues and fiddle a bit with the tax.

2. The big one: should South Africa nationalise? We actually think YES, but not now! Hear us out will you:

• Of the individuals suggesting or vehemently red eyed towards nationalisation; none is yet to give a detailed analysis, overview, or even a plan as to how they’re going to do this. There has been no attempt at the figures, the process, the consequences, or even a bail out regarding this. We’ve heard the demands and the cry to reclaim the country’s wealth for the poor, all noble but so was Zambia’s, Argentina’s, or the British Coal’s call for nationalisation. We need a clear cut strategy (with fallbacks) if we are to reap from this like Bolivia, Chile, or Poland; we cannot afford to jump heart first.

• Our country is heavily reliant on foreign investment at the moment, with the mining industry bringing in 50% of the nation’s foreign exchange, 20% worth of investments, and R1.9 trillion in foreign savings [19]. When nationalisation first hit foreign ears, they got cold feet and some even started running to less ‘volatile’ shores. Let us first attract foreign investors to other industries of the nation, now in all honesty we haven’t really done so since 2006 [30] ; but we must diversify our investments pockets, and even start developing other industries like the digital industries, or even pump funds into the small enterprises to entice foreign pockets. This will ensure that if nationalisation screams Zambia, we can still live fed; knowing that we didn’t kill our one cash cow, and that there’s beef and milk in other kraals.

If you’re asking when; our answer is when we’ve substantially managed to spread out the foreign investment, when we’ve attracted enough investors to other industries; well enough that we aren’t drowning if the cold feet investors start running. But that’s just our two cents; what do you see?

References

1. http://www.merriam-webster.com/dictionary/nationalization
2. http://www.amazon.com/Economics-Feasible-Socialism-Alec-Nove/dp/0043350496
3. http://www.investopedia.com/terms/e/expropriation.asp
4. http://csis.org/files/media/csis/pubs/issues200605.pdf
5. http://news.bbc.co.uk/2/hi/americas/4963348.stm
6. http://www.washingtonpost.com/wp-dyn/content/article/2006/10/29/AR2006102900036.html
7. http://www.cbsnews.com/stories/2009/12/07/world/main5920409.shtm
8. http://www.historylearningsite.co.uk/labour_party_nationalisation.htm
9. http://www.independent.co.uk/news/business/analysis-and-features/king-coal-makes-a-comeback-459918.html
10. http://www.codelco.com/historia/prontus_codelco/2011-02-25/103555.html
11. http://books.google.de/books?id=y2h3KuCIQI4C&pg=PA325&dq=allende MAPU&hl=de&ei=V05PTMW8EYyG4gbJhuXWBw&sa=X&oi=book_result&ct=result&resnum=6&ved=0CEYQ6AEwBQ#v=onepage&q=allende MAPU&f=false
12. http://www.cochilco.cl/english/normativa/fr_normativa.html
13. http://newleftreview.org/
14. http://www.reuters.com/article/2008/07/11/chile-mining-idUSN1144866820080711
15. http://www.economist.com/node/17311933
16. http://www.andibradley.com/whatya/aug10.htm
17. http://www.sahistory.org.za/dated-event/kaunda-announces-nationalisation-copper-mines
18. http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=578:failure-of-zambias-nationalisation-programme-exploring-the-factors-that-precipitated-the-collapsedenine-walters&catid=82:african-industry-a-business&Itemid=266
19. http://www.southafrica.info/business/economy/sectors/mining.htm#.U1VBq84bDW4
20. http://www.bullion.org.za/content/?pid=81&pagename=Base Metals and Minerals?pid=10&pagename=Education
21. http://www.gt.co.za/news/mining/2014/02/foreign-investors-still-wary-of-challenges-facing-mining-projects-in-africa/
22. http://www.mediaclubsouthafrica.com/economy/37-economy/economy_bg/111-sa-economy-key-sectors
23. http://www.eldis.org/go/home&id=17530&type=Document#.U1WHUs4bDW4
24. http://www.ilo.org/migrant/lang--en/index.htm
25. http://www.equinetafrica.org/bibl/docs/healthpersonnel.pdf
26. http://jae.oxfordjournals.org/content/13/suppl_2/ii15.abstract
27. http://www.bdlive.co.za/national/labour/2014/01/14/expertise-flows-back-into-sa-as-brain-drain-is-reversed
28. http://mg.co.za/article/2013-04-17-sas-maths-science-education-ranked-second-last-in-world
29. http://www.ciibroadcasting.com/2012/09/13/sa-education-system-ranked-one-of-the-worst-in-world/
30. http://www.bdlive.co.za/business/2014/01/29/south-africas-static-market-doing-little-to-attract-foreign-investment

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