State role debated: Talk of nationalisation has investors concerned, despite assurances from the government

Thanks to its economic centrality South Africa’s mining industry has long been the focus of political rhetoric, which has sometimes resulted in polarising debates. Calls from radical elements in the African National Congress (ANC) over the course of 2011 for the nationalisation of mines have badly shaken investor confidence and – while these calls have largely been dismissed – there is an ongoing debate about how the state can better utilise its mineral resources to address poverty and high unemployment. A clear ruling on nationalisation in South Africa is expected in 2012, although the presidential administration has regularly reassured investors that nationalisation is not a planned policy.

Resource nationalism in South Africa reflects a more global trend, with states seeking to benefit further from their mineral assets by increasing taxes or royalties on the sale of resources or proposing wholesale nationalisation. According to Ernst & Young’s annual risk survey, published in August 2011, resource nationalism is now the number one concern among mining executives, replacing capital allocation. Australia and Indonesia have both made steps in this regard, while elsewhere in Africa, Ghana recently raised royalties and corporate taxes, as well as introduced a new windfall tax. In South Africa, mine ownership is especially politicised given the legacy of apartheid. The country’s 2004 Mining Charter has set a 2014 target for transferring 26% of mine ownership into black hands.

THE MAIN PROPONENT: Julius Malema, the former leader of the ANC’s youth wing, has been one of the most prominent proponents of mine nationalisation, arguing that it would help alleviate poverty and inequality. Despite some recoveries in GDP growth rates through 2010 and 2011, unemployment in South Africa stood at 23.9% in the fourth quarter of 2011, while an estimated 39% of the population live on less than R388 ($47.50) per month.

Malema began proposing mine nationalisation in December 2007 as provincial secretary of the ANC Youth League. Along with nationalisation, he advocated for land redistribution, calling for the return of land without compensation.

Malema’s promotion of mine nationalisation became more urgent through 2011. At the ANC’s 99th anniversary celebration in January 2011, Malema called for nationalisation as the “only solution” to the country’s problems, taking aim at big business, particularly firms run by “white males”.

OPPOSITION: However, opposition to nationalisation is widespread both inside and outside the ANC, with many citing investor uncertainty and the importance of foreign direct investment for economic growth as reason enough to dismiss it. When Cynthia Carroll, the CEO of industry giant Anglo American, warned at the 2011 Mining Indaba that nationalisation would be the “road to ruin” for South Africa, the minister of mineral resources, Susan Shabangu, echoed her sentiments. Shabangu gave assurances that nationalisation was not ANC policy and that it was vital to “attract more investments” to the sector.

The ANC did, however, commission a report on the impact of government mining takeovers elsewhere on the continent, due for publication in 2012.

ANC SUSPENDS MALEMA: In April 2012 Malema was expelled from the ANC, following an initial suspension in November 2011 for sowing divisions and bringing the party into disrepute for a variety of infractions.

Bobby Godsell, the former CEO of gold mining firm AngloGold Ashanti and member of the National Planning Commission (NPC) – which reports directly to the president and is in charge of long-term strategic planning – has noted that nationalisation with compensation would be financially impossible for the South African government, while if nationalisation without compensation was to be implemented, it would require making amendments to the Bill of Rights.

Other members of the NPC have similarly stressed the importance of clarity over property ownership for economic growth. As former politician-turned-businessman Cyril Ramaphosa has commented, “Issues of nationalisation will continue to be debated … but in the end we would like to see more certainty on this issue of property ownership.”

IMPACT: The impact of uncertainty on investor confidence is reflected in South Africa’s declining position in the “Annual Survey of Mining Companies”, compiled by the Canada-based Fraser Institute. The survey, which ranks the attractiveness of world mining destinations for investors, placed South Africa 67th out of 79 countries and territories in 2010, down from 37th out of 64 countries and territories in 2006. South Africa did, however, climb 13 places in the 2011/12 survey to 54th out of 93 jurisdictions.

Actors in the sector observed that South Africa’s recovery in the rankings was due in part to commitments to infrastructure investments made by the government. However, Fred McMahon, coordinator of the survey and the vice-president of international policy research at the Fraser Institute, has noted that “upholding the rule of law” and “respecting negotiated contracts and property rights” were also critical for encouraging investment in the industry.

Despite South Africa’s improved ranking, the CEO of one of the largest banks in the country – Nedbank – warned in early March 2012 that investment was being lost due to policy uncertainty. According to Mike Brown, South Africa had “arguably” missed “most” of the current mining boom because of policies that were not market-friendly.

TRANSFORMATION & TAXATION: While the ANC has repeatedly insisted that nationalisation is not government policy, South Africa is nonetheless seeking to strengthen its enforcement of the 2004 Mining Charter’s transformation demands.

The document was supposed to radically change the mining industry, with black ownership targeted at 15% by 2007, but a five-year government review of the charter found it had reached only 8.9% in 2009. In response, the government re-launched the charter in September 2010, stressing the importance of the 26% black ownership target for 2014.

Under the new charter, companies will face penalties for non-compliance that could be as severe as the repeal of mining licences. In late 2011 the government cancelled the mining rights of prospecting firm Central Rand Gold for failure to fully implement its social labour and mining works plan. While the right was reinstated three months later, it reflects the government’s willingness to adopt punitive measures.

Leading platinum producer Impala Platinum negotiated one of the best-known empowerment deals, directly targeting the local community and lower-level employees. Concluded in 2007, a 13.4% stake of Impala Platinum was transferred to a holding company owned by the Royal Bafokeng Nation – representing a community of 300,000 – in lieu of future royalty payments to the owners of the land mined by Impala Platinum. In addition, an employee share ownership programme passed on the benefits of the 3% appreciation of the group’s equity to around 28,000 staff. The world’s largest platinum producer, Anglo American Platinum, announced in late 2011 that it would implement a similar deal worth some R3.5bn ($428.4m), which would give local communities 2.33% of the group.

The possible introduction of higher mining taxes is another source of uncertainty for investors. In March 2011 the former deputy minister for economic development, Enoch Godongwana, stressed that the country was getting a “raw deal” with regard to mining. One of the options reportedly considered by the government was modelled on Australia’s controversial resources tax, which started as a 40% tax on profits but was reduced to 30% following widespread criticism.

However, at the Mining Indaba in early 2012, the national planning minister, Trevor Manuel, assured the industry no surprise taxes would be levied and that if the ANC report did recommend an increase in taxes, the government would work around a long-term scenario in consultation with the sector. The ANC’s report is set to be debated at the ANC’s June 2012 policy conference and possibly again in December 2012.