Rational resource nationalism is not about nationalisation
‘Good’ resource nationalism is simple, change the formula tax so that rich mines pay at a higher rate than poorer ones
Tokollo Matsabu hit the nail on the head (Resource Nationalism doesn’t have to be a dirty word — ask Norway, June 27 2019) when he said, “Taxation must incentivise investment but also ensure that super-profits (mineral rents) are higher rated and directed to the people.”
This was after he discussed failed examples such as Zambia and Tanzania of “the wrong kind of resource nationalism”. Export bans to encourage beneficiation and empowerment that “demands local capital ownership”, which mining firms fund in advance of profits — “instead of leading local entrepreneurs, we end up with profit-taking fat cats”.
He might also have added revenue-based royalties raise the cut-off grade for mineral deposits, thus preventing optimal use of the country’s mineral wealth.
So what then is the “right kind of resource nationalism?” Matsabu correctly directs us to focus on taxation both as a means of incentivising investment as well as collecting the super-profits (mineral rents). In other words, rational resource nationalism is not about nationalisation, ruinously high royalties, free carries for locals or government, or regulatory excess. Indeed, the only things you need to “nationalise” are the mineral rents.
These, incidentally, constitute the “delicious fruit cake” that Julius Malema spoke of when he was campaigning for nationalisation of the mines before Marikana. Little did he know, however, that we can have our cake and eat it without nationalisation — a process guaranteed to lose the cake for all!
But how do we do this at the same time as incentivising investment?
As it happens, we have had the benefit of such a system in the gold mining industry where the progressive formula tax has applied for at least three quarters of a century. It is somewhat watered down now but has worked well as a proxy for rent collection when, as in 2007, post-capex mining profit (that is, ignoring depreciation) was taxed at a rate of 40.5% when it exceeded 50% of revenue and at 0% when it was less than 5%.
Moreover, just as the gold mining formula collects rent off richer deposits, so land rental collection, based on land values, collects the unearned revenue, due solely to locational advantage
Although there is room for debate as to where exactly the top rate should lie, the principle is clear: rich mines, such as those with high grade ore and shallow deposits, would pay at a higher rate than poorer mines where there are no super-profits or rent.
The Australians have experimented and attempted some sophisticated ways of collecting resource rents for years beginning with the Petroleum Resources Rent Act in 1987, followed by the Resources Super Profits Tax in 2010, and the Mineral Resources Rent Act in 2012. Suffice it to say the debate continues with the industry complaining that some tax rates at about 55% are making Australia a non-competitive mining jurisdiction.
In the meantime, we have a simple tried and tested home-grown solution. Whereas the Davis Tax Committee recommended that gold mine taxation conform to the rest of the industry, we need to do the exact opposite — that is, roll out the formula tax to other mines. Then our finance ministers will have a strong counter to calls for nationalisation or windfall taxes in boom times and subsidies in slumps because the formula tax naturally adjusts for both conditions.
Is this, then, all there is to “good” resource nationalism? Yes, except that we have yet to deal with the elephant in the room when it comes to resources as a whole. After all, are not mineral resources merely a component of natural resources, which also comprise land, the electro-magnetic spectrum and marine resources, to mention a few?
So can we apply the same principles? After all, the preamble to the constitution states that SA belongs to all who live in it. Is there any reason, then, why we should not simply collect the rent on our land? On the contrary, as proposed by Matsabu, it is much better to collect the community-created rents on land than to tax to the products of labour and capital.
Moreover, just as the gold mining formula collects rent off richer deposits, so land rental collection, based on land values, collects the unearned revenue, due solely to locational advantage. And it would have the added advantage of incentivising owners of underutilised land to sell instead of, as is often now the case, coasting along for a free ride as the growth of the community raises their land values regardless of their input.
Land would therefore immediately become more freely affordable and available while the economy would, at the same time, enjoy a kickstart from moribund levels. Just as in the mining industry, the formula tax makes marginal projects more feasible; so would a move to land rental instead of taxation as it would boost economic activity in marginal locations, including in many rural areas where heavy levels of tax have obliterated it.
At the same time, it would go a long way to defusing the land crisis since, by capturing all the rent on all of our land, every citizen would benefit without the disruption and chaos of expropriations that only benefit a few. The obligation to pay rent, however little it might be in some rural areas, would reinforce the need for proper mentorship and support for the beneficiaries of the ongoing process of reform and restitution.
One of the major problems with our present system of taxation is that it under collects rent on prime sites and by attempting to collect from sites that have minimal locational advantage, merely prevents economic activity from taking place there. By moving, instead, towards collection of land rentals we would also be going a long way towards remedying the spatial inequities of apartheid as land rentals in townships would be less than in most suburbs.
So, with mineral, land and other resource rentals collected and taxation reduced, resource nationalism need, indeed, never be a dirty word!
• Meintjes is a senior analyst with a Johannesburg brokerage.