Mine nationalisation without compensation: Gravity of Zwane’s crazy charter sinks in - BizNews, 31 August 2017

By Anthea Jeffery

Mining minister Mosebenzi Zwane is right to call the new mining charter an important new ‘revolutionary tool’. One of its key aims is to benefit the state mining company and help bring about incremental mine nationalisation without compensation. The government claims this will help increase prosperity, but international experience with state mining companies elsewhere shows the opposite. So too does the degree of incompetence, malfeasance, and corruption already evident at many of South Africa’s most important state-owned enterprises (SOEs), including Petro SA, Eskom, Transnet, Prasa, Denel, and SAA.

According to the new mining charter (gazetted by the minister on 15th June 2017 and currently on hold pending a judicial review of its legality), applicants for prospecting right must have ‘a minimum of 50% + 1 black person shareholding’ (or 51% black ownership for short). Holders of mining rights (present or prospective) will need 30% black ownership, up from 26% at present. 

The 51% black ownership requirement for new prospecting rights will effectively bar many mining majors from obtaining such rights. Yet existing mines often need new prospecting rights to keep up with exploration and plan for the future. This clause, however, will ‘cut them off from the lifeblood of fresh mineral deposits’ (to cite Warren Beech, head of mining at law firm Hogan Lovells) unless they raise their BEE ownership to 51% and concede majority control to others.

Under the charter, mining companies that want to sell ‘mining assets’ will also be obliged to give 51% black-owned companies ‘a preferential…option to purchase’ these. The charter does not explain how such assets are to be defined. Nor does it say how long such preferential options must be kept open, or how purchase prices are to be decided.

This restriction could apply to many prospective sales now in the offing. Anglo American plc, for instance, may yet want to sell several of its South African subsidiaries, including Kumba Iron Ore. Under the new charter, however, it could find itself obliged to sell to a 51% black-owned company.

Cash-strapped Lonmin has spoken of selling spare capacity at some of its processing plants, including its smelter, to help maintain its mining operations. If this spare capacity counts as a ‘mining asset’, then any such sale could be similarly constrained. 

One major beneficiary of these charter provisions is likely to be South Africa’s state mining company.  This company, the African Exploration Mining and Finance Corporation (African Mining), was established in 1944, lay dormant until 2007, and was then resuscitated by its parent company, the Central Energy Fund.

Since African Mining began mining coal in 2011, private sector objections to it have been surprisingly muted – though the Chamber of Mines has stressed the need for the government to ensure ‘a level playing field’. However, as mining law expert Peter Leon points out, fairness is difficult to achieve when African Mining can rely on taxpayer revenue for funding and a fellow state entity (the Department of Mineral Resources or DMR) to grant it a host of mining and prospecting rights.

In 2016 the DMR put forward a draft bill aimed at establishing African Mining as a separate company with new powers. Under this bill, it will be able to acquire mining rights from the DMR, undertake its own mining operations, and ‘acquire shares or other interests’ in companies already engaged in mining.

The new charter will help African Mining fulfil these aims. The rule requiring 51% black ownership for the granting of prospecting rights will help ensure that these rights go to it, rather than the established mining majors. The further requirement that all mining assets must first be offered to 51% black-owned companies will help it to acquire the shares and other assets of existing companies, as it plans to do. 

The costly obligations to be imposed on mining majors under the new charter could also encourage them to sell off their mining assets, which African Mining would then have a preferential right to buy. In addition, if the mining rights of existing companies are cancelled for non-compliance with the new charter – and full compliance will be virtually impossible to maintain – then African Mining will be waiting in the wings for the DMR to grant it these newly available rights.

The state mining company’s acquisition of prospecting rights, mining rights, and mining assets is thus likely to proceed apace once the new charter is in force. This will help bring about the incremental and uncompensated mine nationalisation for which the ANC Youth League and other ANC allies have long been calling.

As far back as 2009, the youth league insisted that mine nationalisation was needed to give black South Africans ‘economic freedom’ from white domination. To this end, it called for the establishment of a state mining company which would own at least 60% of all new mining investments and would incrementally expand its ownership of existing mines.

In September 2016, the Youth League revived this call, saying there had long been a ‘strategic need for the nationalisation of mines’. It demanded to know when the bill establishing the state mining company would be adopted by Parliament, adding: ‘As soon as it is operational, it must take up ownership and control of the greater mines in the country.’ The new charter will help achieve these objectives.

At its Mangaung national conference in 2012, the ANC decided against any outright seizure of mining companies as the compensation payable could exceed R1 trillion. The charter, however, is a new ‘revolutionary tool’ (as Mr Zwane says) which could help bring about an indirect and incremental process of mine nationalisation.

The ANC and its allies in the Youth League and elsewhere like to pretend that ever greater state ownership and control of the mining industry will help increase and spread the benefits of South Africa’s great mineral wealth. But international experience shows that state mining companies generally fail, managing to produce only a fraction of what the private sector is able to achieve.

The reasons are plain – and should resonate among all South Africans. State mining companies are generally plagued by poor management, rising inefficiency, and diminishing competitiveness. They also battle to raise the funds for new or expanded mining operations – and especially so when public debt is high, tax revenues are static or shrinking, and governments face many other demands on the public purse.

However, the most important obstacle to success is usually poor governance. State mining companies (in the careful words of the Extractive Industries Source Book) are often captured by small and privileged elites, which use them for their own gains rather than in the national interest.

In practice, the mining revenues generated by state companies are often concealed and then siphoned off to individual bank accounts abroad. This risk is particularly telling in South Africa, where the rapid enrichment of the Gupta family has shown how easily public resources can be commandeered and spirited out of the country with the help of the politically powerful.

The new mining charter has many other damaging ramifications. However, its likely role in assisting the state mining company is reason alone to reject it. Far from helping to counter rising poverty levels in South Africa, it will further empower the ANC and advance its socialist objectives. It will also bring great wealth and power to a narrow group of corrupt politicians and their favoured crony capitalists.

*Anthea Jeffery is Head of Policy Research at the Institute of Race Relations, a think-tank that promotes political and economic freedom. 

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