Nationalisation

Now that the idea of nationalisation has risen from the dead like a movie monster, we need to talk about its meaning.

Nationalisation is when the State takes ownership of assets from the private sector.

Nationalisation is not State ownership, or part State ownership, or joint ventures.

Joint ventures by the State and the private sector usually come about at the start of a project. An example of partnership is in Namibia and in Botswana. In each of those countries the State and De Beers have a 50-50 partnership.

When certain politicians and commentators refer to Botswana’s experience of nationalisation, they are referring to the idea of a joint venture.

The difference is that investors often don’t mind going into a partnership with the State. The State is likely to protect the private party’s interest, after all.

The State may bring to the joint venture mineral rights: the private sector may provide the capital.

Then there’s the question of what percentage should be owned by the State.

Again, if it’s a new joint venture, this usually means 50-50. But the stakes are negotiable. It could be that the private sector entity wants to own 51%, with the State having the remaining 49%. It could be that the State wants to own 51% or more.

Anton Rupert, founder of the Rembrandt conglomerate, insisted that the best structure for investment was a true partnership of 50-50 ownership. This makes sense. Both parties have to compromise on decisions.

Interestingly, the ownership of a controlling stake does not seem to translate automatically into a right to run the company. In South Africa for many years the State owned about 70% of Telkom, yet it was clear that the foreign minority partner called the shots.

What is more important is how the stake was obtained. And what is meant by nationalisation is the forced acquisition by the State — and therefore forced sale by private investors — of privately owned assets.

This is what investors fear.

What some mean when they say “nationalisation” is “expropriation without compensation”. This is theft. Even when the argument is that it is justified to put right an earlier theft, as in Zimbabwe’s land grabs, it is something the State can do only once until memories fade or a new regime takes power. Even then, few investors would initially venture into a country that had nationalised without compensation. They would not want to risk their money being stolen.

Those who do take the risk of investing in places where their property rights may be threatened will demand high returns indeed. If you don’t believe me take a close look at how profitable Impala Platinum’s investment in platinum mining in Zimbabwe. After only a few years of being in Zimbabwe, the company boasted that even if its assets were expropriated it would already have made back its initial investment.

In South Africa, the Mining Charter and the attendant mining legislation requires that investors go into partnership with black investors on new mining ventures.

On the other hand, when the idea of the forced sale of 51% of mining companies was suggested in a government document that came to be known as the leaked Mining Charter widespread panic followed and investment flowed out of South Africa. Investors saw that as expropriation.

The Mining Charter rests on what has been the biggest nationalisation post-1994, and the fulfilment of a promise in the Freedom Charter, the nationalisation of mineral rights.

Yet that nationalisation has been accomplished without a cent being paid in compensation, because the previous owners of the mineral rights can convert their rights into licences and continue mining as long as they comply with the Mining Charter.

Having achieved this, why would South Africa want to upset the whole, delicate and complex agreement, destroying investor sentiment in the process?

This last issue is important. For even if nationalisation of the mining industry through expropriation meant an increase in revenue from newly owned mines, it’s a safe bet that it would lead to widespread outflow of capital by investors in other areas.

After all, if the State “goes after” gold and platinum, why not other areas of the economy?

South Africa depends on inflows of capital, by investors willing to risk money in South Africa for a moderate reward, because they feel their money is safe.

If they don’t feel their money is safe, they will take it out of the country and send it elsewhere.

Disinvestment was one of the pressures the apartheid government faced in the 1980s as foreign companies pulled their money out of the country. It contributed, along with growing isolation from a sports and cultural boycott, to persuading the country’s leaders that they should consider reform, and led to the crucial unbanning of the ANC and PAC in 1990 and the negotiated settlement.

It also meant that the incoming government inherited an economy in poor shape.

Nationalisation would not automatically upset investors. For instance, if a “national champion” like Sasol ran into financial trouble and the State decided that it could only come to Sasol’s aid by nationalising it, that might be seen as positive.

Spending billions on nationalising or part-nationalising mines is another matter. Remember that the present situation allows private investors to risk their money in capitalising mining operations. Mining is a risky business. Platinum mines look like a fantastic investment now, but what if a replacement metal is found for catalytic converters?

Concerns that a non-renewable resource is being used up for the benefit of private investors is another matter, and the answer to these concerns is introducing royalties, simply an extra tax, on mining companies to compensate. Proposed mining royalties have been delayed but not scrapped.

Incidentally, around the same time as the idea of nationalisation surfaced, I noted that privatisation, in the sense of outright divestiture of State assets is not quite dead either.

Despite the very idea being shunned in government discourse, the possibility of divestiture of some of the State’s property was raised by Department of Public Works Minister Geoff Doidge.

Finally, I have not noticed the markets reacting in any way to the recent strident calls for nationalisation. I guess that is because investors don’t believe that anyone in government is stupid enough to actually contemplate such an act.