BUSINESS LIVE / 14 JUNE 2018 - 05:06 / KANSHUKAN RAJARATNAM AND MYURAN RAJARATNAM
Errors of commission are plentiful but errors of omission are just as large and just as significant
The Mining Charter (or the lack thereof) has clearly created great uncertainty. Amid this policy vacuum mining companies went on an investment strike, and their employees simply went on strike!
Picture: 123RF/PIOTR PAWINSKI
The fault lies at the feet of many in the previous administration. They made both errors of commission and omission.
Errors of commission are plentiful — just look at the state of our state-owned enterprises (SOEs) — all that money wasted and stolen from our people.
But the errors of omission are just as large and just as significant. The previous administration was so focused on malfeasance that it forgot to govern. They were supposed to provide policy certainty, but failed miserably on this count.
Nature abhors a vacuum. Financial markets are no different. They abhor the vacuum of knowledge.
Financial markets are adept at handling facts, as facts speak for themselves.
A 10% CARRY ON ALL MINERAL RIGHTS … WILL GO SOME WAY TO REDRESS INEQUALITY AND SHOULD BE FREE FOR COMMUNITIES AND EMPLOYEES.
Markets can also handle risk, because with risk one has a decent idea of the various possible outcomes and how likely they are.
It is uncertainty that markets hate.
As economist Frank Knight pointed out many years ago, with uncertainty the range of outcomes can be unknown and sometimes unknowable or indescribable.
Markets hate this. We are glad the Mining Charter’s release is imminent.
There are a few bones of contention in the new charter. A major one for companies is the potential 10% free carry to be shared between communities and previously disadvantaged employees for new mineral rights.
Although we claim no particular insight on whether 10% is the right number, we disagree with both the mining companies and the new administration on various aspects of this proposal.
We disagree that the free carry should only be for new mineral rights.
SA is one of the most unequal societies in the world measured by the Gini coefficient. The country has been subject to multiple decades of oppression.
We have also had a recent decade of maladministration that, according to World Bank statistics, has meant that SA is now more unequal at the end of the last administration than it was at the dawn of democracy.
A 10% carry on all mineral rights — not just new rights — will go some way to redress this inequality.
The carry should be free for communities and employees. A free carry means there is no cost in capital raising or expenditure to the 10% holders.
The other shareholders owning 90% of the company would have to fund 100%.
First, as we pointed out in a previous article, debt-funded black economic empowerment (BEE) deals can be a crime against fair play (Four simple rules to solve BEE bind, August 18 2015). Once too much debt is loaded into these BEE structures the economic reality is that at the end of the lock-up period, when the debt is repaid, what companies actually hand over is much less. The only people making money here are the bankers and lawyers. Enough said.
Second, it is misleading to say the carry is free, in the sense that it is all cost and no benefit. Mining is largely a fixed-cost business.
The goodwill of communities and labour can mean fewer strikes and improved productivity, meaning much higher profitability. Consider Royal Bafokeng Platinum.
Third, mining companies may argue that free carry means less investment.
Perhaps. A simple 10% profit share can mean the internal rate of return (IRR) of a project, under simple assumptions, can drop by 10%. Projects with gross IRRs of 15%, 25% or 35% can drop to 13.5%, 22.5% and 31.5% respectively once the free carry is accounted for.
Sure, marginal projects may suffer, but good projects will still get the go-ahead.
We believe uncertainty is a much bigger detractor than free carry.
Higher uncertainty means higher hurdle rates before projects get the go-ahead.
Furthermore, once empowered must be always empowered. But the level of true empowerment must only be calculated on what is cumulatively handed over at the end of various BEE lock-up periods (after all the debt has been settled).
The value released post debt settlement is the true measurement of empowerment levels.
We don’t claim to know all the answers, or even all the problems, but we do know one thing, and that is SA cannot continue on its current trajectory.
We need new and better policies to provide meaningful upliftment to all our people.
• Prof Kanshukan Rajaratnam is an associate professor of finance and the acting dean in the Faculty of Commerce at UCT, and Dr Myuran Rajaratnam is a portfolio manager at a pension fund. They write in their personal capacities.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER