Nationalisation: Will ANC researchers take note of the experience of their African brethren?

According to a recent IOL news piece, “Zambia’s Banda says copper windfall tax is ‘bad business’", Zambian President Rupiah Banda has “ruled out windfall taxes for mining companies enjoying record copper prices, saying that changing the rules for foreign investors was plain bad business”. South African authorities can take a leaf out of Banda’s book by rejecting out-of-hand the ludicrous proposals to nationalise SA mines, as opposed to drawing out the process by dispatching a task team to determine nationalisation’s viability.

The uncertainty created by drawing out this process is no doubt deterring investment as mining companies sit in limbo waiting to discover their future. Zambia is well aware of the consequences of interfering in the market by changing the rules of the game. After gaining independence in the 1960’s the Zambian government thought that by controlling the copper companies they would be able to achieve their developmental goals with the revenues derived from mining operations. However, when the world price of copper dropped unexpectedly in the mid 1970s, it put the fiscus under immense pressure and Zambia was plunged into debt as the government attempted to sustain the now unprofitable mining operations. The government was forced to make some painful decisions, the cost of which ultimately came at the expense of development in other sectors of the economy. As a consequence of the disastrous mine nationalisation policy, Zambia went from one of sub-Saharan Africa’s most prosperous nations to one of its poorest within a matter of decades. After privatising operations in 2000 Zambian copper output has made steady progress but has only recently recovered to output levels last seen when the sector was nationalised in the late ‘60’s.

Ghana nationalised its mining sector in the early 1960s with the objective of “maximising government revenue ... and employment generation”. Instead, the industry experienced a dramatic decline following nationalisation, with gold production falling from 915,317 ounces in 1960 to 282,299 ounces by 1984. The reasons given by the World Bank for the decline were a “lack of foreign exchange to maintain and rehabilitate the mines; lack of capital investment for mining skills; infrastructure deterioration, particularly shortages of rail capacity for manganese and bauxite; mining company financial problems due to the greatly over-valued currency and spiralling inflation; a declining grade of gold ore; the exhaustion of high grade manganese ore; the depletion of the more lucrative diamond mines in many areas; high absenteeism and low worker discipline; and pilfering, illegal panning and smuggling of gold and diamonds”.

In 1983, Ghana introduced its “Economic Recovery Plan” (ERP), which implemented radical mine privatisation. At the time of the launch of ERP, gold production had fallen to 285,291 ounces. A dramatic improvement followed in the gold mining sector and rapid growth in annual gold production. After a mere 12 years, the privatised mines increased output from about 300,000 tons to approximately 2.5 million tons, an increase of over 700 per cent. In contrast, when mining operations were held in the hands of government, output declined steadily over a period of 29 years, from about 750,000 tons to about 280,000 tons.

Ghana’s gold production increased to 2.9 million ounces in 2009. Since privatisation, the annual gold production in Ghana has increased more than 10 times over the last 27 years, and revenue reached $2.8 billion. As a country, Ghana has benefited from the improvement in its mining situation. According to the US Geological Survey, “The contribution of Ghana’s mining sector to the country’s gross domestic product increased from 1.3% in 1991 to an average of about 5% in recent years. Export earnings from minerals averaged 35%, and the sector was one of the largest contributors to Government revenues through the payment of mineral royalties, employee income taxes, and corporate taxes”. Growth in the mining sector also contributed substantially to a rise in per capita GDP (measured on a ppp basis in 2009 dollars), which increased from $449 in 1983 to $1571 in 2009.

Attempts at nationalisation reveal that whenever government involves itself with business, it unleashes a conflicting mix of social and efficiency objectives. To justify nationalisation, governments invariably make a raft of promises to voters but when faced with difficult but necessary decisions, often driven by changes internationally, they default on those promises. These promises do not come without their consequences and invariably inflict substantial damage on the domestic economy.

Nationalisation of private businesses is all the more perplexing because, in all cases, the government receives significant revenues from private companies without carrying any of the risks involved in operating a business.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 5 July 2011