WARNING: This is Version 1 of my old archive, so Photos will NOT work and many links will NOT work. But you can find articles by searching on the Titles. There is a lot of information in this archive. Use the SEARCH BAR at the top right. Prior to December 2012; I was a pro-Christian type of Conservative. I was unaware of the mass of Jewish lies in history, especially the lies regarding WW2 and Hitler. So in here you will find pro-Jewish and pro-Israel material. I was definitely WRONG about the Boeremag and Janusz Walus. They were for real.
Original Post Date: 2010-09-20 Time: 20:00:02 Posted By: News Poster
By Gavin Keeton and Greg White
Johannesburg – DISCUSSION of the African National Congress Youth League’s controversial proposal to nationalise the mining industry has focused largely on the motives and political implications of this proposal rather than its likely financial and economic costs.
The league’s document on nationalisation suggests that nationalisation will enhance the state’s “fiscal capacity”. Such a conclusion is not supported by the facts.
Section 25 of the constitution makes provision for property to be expropriated by the state but provides also that the owners should receive as compensation “the market value of such property”.
A very rough estimate of such a value can be made from the market capitalisation of mining companies listed on the JSE – about R1,7-trillion, or 75% of SA’s gross domestic product (GDP). This amount exaggerates the value of South African mines, as half is made up by the listings of BHP Billiton and Anglo American – companies with substantial assets outside SA. In addition, there is considerable double counting with, for example, Anglo American owning 80% of Anglo Platinum and 66% of Kumba.
Making allowance for these suggests that the market value of listed South African mines is about R850bn. If the government were to borrow this sum at current interest rates, its interest bill would rise by about R72bn a year – which is more than 40% of the current education budget and almost 8% of total state spending. Funding this would be only partly offset by the aftertax profits of such companies, which would now belong to the state (about R20bn based on current price- earnings ratios).
If, as has sometimes been suggested, state ownership was limited to only 51% of the companies, government debt would still rise by more than 50% or R430bn. Interest payments would probably rise much more than 50%, as such a large sum would not be available in the local capital markets without a dramatic rise in long-term interest rates, especially at a time when parastatals such as Eskom are also seeking large amounts of borrowings.
Nationalisation with compensation will therefore incur a very large cost to the state that will have to be offset against competing spending priorities such as education, welfare and salaries. For this reason, the league has proposed that section 25 of the constitution be changed to remove the obligation to compensate property owners. Such a change would, however, not in fact significantly change the arithmetic of nationalisation as it would not remove the obligation to compensate foreign investors enshrined in SA’s bilateral investment treaties with countries such as the UK, Germany, France and Switzerland.
It is ironic therefore that if section 25 of the constitution was to be changed, foreign shareholders would still be compensated but local shareholders would not. The local shareholders are overwhelmingly pension funds, including the Public Investment Corporation, whose members’ assets would decline accordingly.
According to Allan Gray, more than half the shares of several of SA’s largest mining companies – 75,8% of AngloGold Ashanti, 75,5% of Gold Fields, 56,4% of Harmony and 50,4% of Impala Platinum – are held by foreign investors.
BHP Billiton and Anglo American (and therefore Anglo Platinum and Kumba) are also mainly owned by foreign shareholders. The compensation of foreign shareholders would therefore mean very significant capital outflows from SA, with important negative implications for the balance of payments and SA’s future economic performance.
For several years, SA has run significant deficits on the current account of the balance of payments (7% of GDP in 2007 and 2008, 4% last year.) This is because our savings (15% of GDP) is inadequate to fund our investment, which at 22% of GDP is still insufficient to sustain the desired 6% a year GDP growth.
This gap between savings and investment must be funded by foreign capital inflows. Since 1994, most of these inflows have taken the form of foreign purchases of South African equities (R414bn) – much of this in mining. It is naive to expect that foreigners will continue to invest in South African shares if the property clause is scrapped and nationalisation of the mines occurs without compensation of (local) shareholders.
Thus the price of nationalisation would be not just the capital outflows necessary to compensate the foreign owners of mining shares, but potentially even larger outflows as other foreign shareholders exit the rest of our stock market. Even if foreigners just stop buying shares, investment levels must fall to our level of savings (15% of GDP) and SA will be trapped in low GDP growth (perhaps 2%-3% a year) and soaring unemployment. With outflows, the effect will be even worse.
A final cost of nationalisation lies in the cyclical nature of the mining industry.
During commodity price downswings, mines frequently have to turn to their shareholders for large injections of capital. But this requirement for capital always occurs at precisely the time when the government is least able to provide it.
For example, the recent fall in commodity prices meant several South African mining companies required large capital injections from their shareholders. This was at a time when the budget deficit had already soared because of the same adverse global economic conditions that caused commodity prices to fall. Against a backdrop of competing needs, it is extremely unlikely that the government could have justified a capital injection into a state-owned mining company at such a time. This is the reason state-owned mining companies have historically performed so poorly – regardless of the strength or weakness of their management – and so nationalisation would further damage SA’s already struggling major export industry.
It is critical that these budgetary and economic costs inform the debate on nationalisation. Failure to consider them could lead to policy decisions that will dramatically undermine future economic growth and sharply reduce the government’s ability to fund much-needed social services.
Keeton and White are with the economics department at Rhodes University.
Original Source: 
Original date published: 20 September 2010
Source: http://allafrica.com/stories/201009201309.html?viewall=1