TIM COHEN: Monday comment
THERE is a tiny corner of South African corporate endeavour which ought to be alpha and omega of the nationalisation debate: diamond miner Alexkor.
The history of this little enterprise ought to hold important lessons not only for the African National Congress Youth League but also for Cosatu's more sophisticated take on the nationalisation debate.
The reason is that Alexkor is the one major, concrete example that exists of what happens when mining companies get nationalised. Its history is so sad and reflective of the impossible position of nationalised mining companies. It demonstrates almost perfectly the trajectory that is so often the consequence of nationalisation, and Alexkor ought to be the prime case for the defence.
Instead it is forgotten; a tiny corner of the parastatal empire that the political bosses cannot sell for political reasons, but which continues to soak up taxpayers' money year after year.
The state-owned company has now made losses for the past five years - accumulated, these stand at R275m. This is a company that has just received another R100m from the government.
The history of Alexkor is instructive, and it is sad because of the hopes that it once generated. Alexkor was supposed to do all the things the youth league and Cosatu want companies to do: provide jobs; redistribute wealth; increase skills; empower; enrich and embolden. Instead, it has cruelly turned the dreams of interventionists into a procession of job losses and state handouts.
The situation is so much more cruel because the land on which Alexkor operates was the subject of a famous trial in which land was won back for the local Alexander Bay community by some dedicated lawyers . Acres of newsprint was expended on the case way back in 2003.
The case was brought in terms of the apartheid land restitution programme set out in the Restitution of Land Rights Act, and eventually went all the way to the Constitutional Court in 2003. After a five-year legal battle the court found that the Richtersveld community had legitimate rights of restitution to the land .
After the court case was finalised, the company took the position that the court decision did not actually give the community the right to the land, but merely a claim on it. Hence, having settled the "rights phase", the parties were obliged to enter into a "remedy phase". Achieving a remedy would require an agreement of some sort about how to divide the profits between the community and the company. This was later dubbed the "pooling and sharing joint venture (PSJV)" .
I wrote about Alexkor about a year ago, and at that stage the company actually said a decision on the pooling and sharing joint venture was "urgent" and imminent, even though it had not been signed in seven years.
So it was interesting to see whether, in the intervening period, this "urgent" agreement had made progress.
I should not have got my hopes up. Last year's Alexkor annual report says, unfortunately, the pooling and sharing joint venture has been held up again.
This comment in the report by chairman Reginald Tafara Muzariri is worth quoting at length: "However, while the board has every reason to believe that the company has sufficient resources to continue its operations in the foreseeable future, the current situation is not sustainable in the longer term without a comprehensive strategic plan such as the envisaged establishment of the PSJV .
"It is doubtful that the company would be able to continue as a going concern in the longer term without the implementation of such a plan. Meeting the deed of settlement requirements, a large number of which depended on approvals and processes outside the control of Alexkor and its shareholder, the Department of Public Enterprises, has, however, resulted in a lack of clarity around the strategic plan.
"With significant progress having been made on the deed of settlement, we now expect this clarity to be established for implementation in the 2012 financial year," Mr Muzariri says.
So let's summarise. In the view of the chairman, the company is dead without this agreement - an agreement on which work has been taking place for at least three years already. But they expect it to be completed only in two years!
What company would ever operate this way? If it were a private company, something would be bashed out over a weekend or the business would be closed, surely. The lackadaisical approach is almost beyond parody.
And this is what Cosatu and the youth league want?
There are various counterarguments that might be offered. It could be argued, for example, that the losses are not really the fault of the company , they are the consequence of the diamond market which collapsed in 2008 and the complicated legal process.
Unfortunately, the losses began way back in 2007 when the commodity boom was running full strength. It did manage to make a small operating profit in 2008, of R6m, which did not make up for the previous year's loss of R23m.
This all could have been so different, because the government put out a tender for a 50% privatisation of Alexkor in 2002. In that year, total revenue was R288m. But after the 2001 election, the antiprivatisation Alec Erwin was appointed public enterprises minister , and he presumably put a stop to it.
Once that became clear, contrary to the claim of the youth league that managers won't leave, they did. A string of managers reportedly left for greener pastures, and the result was that turnover dropped dramatically: R264m in 2004, R152m in 2005, and the nadir of R109m in 2007. It then increased again with rising diamond prices, and last year it reached R163,9m. But even that was not enough for the company to reach profitability.
As for jobs, the company now employs just 105 people full-time, down from 691 in 2000.
So what's the hold-up with the pooling and sharing joint venture? It's hard to tell, but this Cosatu and the youth league will just love: the company has decided that all the social services it was providing - from the clinic to the petrol station - are no longer "core".
The company wants to lay off these expenses on the government, in other words, the taxpayer, or the community or both. And this is something presumably they don't want.
So much for social investment. To be fair, it does have other social investment programmes, but if a state company cannot sustainably financially underpin social services, then how are private companies supposed to do it?
Cosatu general secretary Zwelinzima Vavi said last week that the debate over nationalisation started "wrongly and in the wrong place" and that the organisation was not necessarily for nationalisation of all the mines in SA. "But we do say that we need a state that can have a company that can intervene in the strategic minerals," he said.
Yet Alexkor demonstrates why this notion is fallacious. Centuries ago economist Adam Smith could have told him why.
"It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest" goes the famous quote.
State companies consider themselves infallible because they always have the taxpayer to fall back on.
Consequently, they are entities run for the benefit of managers and employees, not customers. They are by definition, antistrategic.
HOW is the nationalisation debate affecting investor sentiment? Judging by the JSE and other markets, investors are adopting a "watch and see" approach. Or are they?
Just compare South African markets with those in Brazil. The Financial Times reports that the Brazilian real soared to a 12-year high against the dollar on Friday which, as we all know, complicates the economic problems of President Dilma Rousseff.
The real traded at a high of 1,5523 versus the US currency, which is pretty amazing for a currency which only began floating in 1999 and which is supposed to be suppressed by investment taxes.
About $42,4bn flowed into Brazil between January and April , more than five times as much as the same period last year.
Compare that to SA. Net foreign buying of South African shares and bonds so far this year stands at about $3bn, compared with about $9bn in the same period last year. In other words, SA is getting only a tiny slice of the carry trade market out there.
Some of this is the consequence of slightly better interest rates in Brazil. Nominal rates are 12,25% and real rates about 6%. SA's real prime overdraft rates are currently about 5%, so it is not an enormous difference.
As for the rand, it has been trading in a very tight range compared to its normal volatility over the past year between R6,60 and R7,40 to the dollar. It is at the strong end of that range now, but it is significant that nobody is talking about 12-year highs.
Likewise, the JSE is trading fairly steadily, and has not been hit unduly by the nationalisation debate. Hence, you could say, investors are not spooked by the nationalisation debate, or at least not yet.
But the interesting question, however, is this: is that just because investors can't believe anyone in this day and age would do anything so stupid?
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