Southern African Institute of Mining and Metallurgy The Rise of Resource Nationalism: A Resurgence of State Control in an Era of Free Markets Or the Legitimate Search for a New Equilibrium? A Study to Inform Multi-stakeholder Dialogue on State-Participation in Mining Compiled by Michael Solomon Cape Town, February, 2012 Disclaimer The Southern African Institute of Mining and Metallurgy, as a body, is not responsible for the statements and opinions advanced in any of its publications. The Rise of Resource Nationalism: Resurgence of State Control in an Era of Free Markets Or the Legitimate Search for a New Equilibrium? P a g e | 2 Southern African Institute of Mining and Metallurgy The Rise of Resource Nationalism? Research Team Project Director Michael Solomon Chairman of the Mineral Economics Committee Southern African Institute of Mining and Metallurgy Project, Production Melanie Low Independent Researcher & Editorial Manager Research Director Dr Sue Cook Research + Planning Executive, Royal Bafokeng Nation Macro-economics Prof Stan Du Plessis Professor of Economics at Stellenbosch University. Vice-Dean (Research) Faculty of Economics and Management Science at Stellenbosch University and President of the Economic Society of South Africa Political Economics Michael Solomon Southern African Institute of Mining and Metallurgy Prof Anthony Butler Department of Political Science, University of Cape Town Dr Michael Khan University of Stellenbosch Fiscal Implications Prof Fred Cawood Head of School, School of Mining Engineering, University of the Witwatersrand, Johannesburg OP Oshokoya School of Mining Engineering, University of the Witwatersrand, Johannesburg Beneficiation Dr Marian Lydall Head: Regional Mineral Development, Mineral Economics & Strategy Unit (MESU), Mintek, Randburg Minerals Policy, SLPs Grant Mitchell Independent Researcher & Transformation State Capacity Dr Hudson Mtegha Senior Lecturer, Mineral Policy School of Mining Engineering, University of the Witwatersrand, Johannesburg Phillip Mogodi MSc candidate & Research Assistant School of Mining Engineering University of the Witwatersrand, Johannesburg Legislative Environment Sivalingum Rungan Senior Lecturer, Minerals Law, School of Mining Engineering, University of the Witwatersrand, Johannesburg Mineral Economics Prof Magnus Ericsson Professor of Mineral Economics, Luleå University of Technology, Sweden Case Studies Luke Raffin Researchers, Kennedy School of Business, Kartik Akileswaran Harvard University Melanie Low Independent Researcher Prof Magnus Ericsson Chief Executive Officer, Raw Materials Group, Sweden Barry Sergeant Freelance mining journalist/writer Country Risk Martin Bekker Manager, Information, Royal Bafokeng Nation Bilateral Treaties Martin Bekker Manager, Information, Royal Bafokeng Nation Economic Impacts Michael Solomon Southern African Institute of Mining and Metallurgy Ogodiseng Letlape Research Officer, Royal Bafokeng Nation Editing & proof reading Cheryl Langbridge Independent Editor A Study to Inform Multi-stakeholder Dialogue on State-Participation in Mining © Southern African Institute of Mining and Metallurgy P a g e | 3 Contents List of Acronyms .............................................................................................................................................. 14 List of Definitions .............................................................................................................................................. 17 SI Units ............................................................................................................................................................. 19 A Letter from His Majesty, Kgosi Leruo Moletlegi of the Royal Bafokeng Nation ........................................ 20 EXECUTIVE SUMMARY: PART 1 .......................................................................................................................... 22 Resource nationalism as a context for understanding the South African debate ................................... 23 Government response to resource nationalistic sentiment ...................................................................... 24 Political risk, investment returns and socio-economic contribution ......................................................... 25 Political elements of resource nationalism ................................................................................................ 25 Features of state ownership of global mineral production ....................................................................... 27 EXECUTIVE SUMMARY: PART 2 .......................................................................................................................... 30 South Africa: a case study .............................................................................................................................. 30 The stated objectives of calls for nationalisation ...................................................................................... 30 The economic and techno-legal realities of nationalisation ....................................................................... 31 Bilateral agreements ................................................................................................................................... 33 Market based institutions ........................................................................................................................... 33 The question of corruption ......................................................................................................................... 33 Achieving the objectives ............................................................................................................................. 33 Institutional capacity ................................................................................................................................... 35 Infrastructure ............................................................................................................................................... 36 Proposals ...................................................................................................................................................... 36 EXECUTIVE SUMMARY: PART 3 .......................................................................................................................... 38 Review of the ANC State Intervention in the Minerals Sector (SIMS) Report ............................................. 38 Critique ......................................................................................................................................................... 39 Overview ...................................................................................................................................................... 41 Structure of the report ................................................................................................................................ 44 Fiscal instruments ........................................................................................................................................ 45 The Brown Tax ............................................................................................................................................. 47 Resource rent tax (RRT) .............................................................................................................................. 47 Defining costs for resource rent taxes ....................................................................................................... 48 Excess profits tax ......................................................................................................................................... 48 Corporate income tax .................................................................................................................................. 48 Profit-based royalty ..................................................................................................................................... 48 The Rise of Resource Nationalism: Resurgence of State Control in an Era of Free Markets Or the Legitimate Search for a New Equilibrium? P a g e | 4 Southern African Institute of Mining and Metallurgy The Rise of Resource Nationalism? Output-based royalties ................................................................................................................................ 48 Graduated price-based windfall tax ............................................................................................................ 48 Specific royalty tax ...................................................................................................................................... 49 State equity .................................................................................................................................................. 49 Existing fiscal instruments in the South African mining sector ................................................................. 49 Proposals for state intervention ..................................................................................................................... 50 Objectives .................................................................................................................................................... 50 Nationalisation as an option for state intervention ................................................................................... 50 The resource rent tax