In the minds of many South Africans, petrochemicals group Sasol must give back to the country through extra taxation or nationalisation because government established the group, says XMP consulting owner Xavier Prevost, reflecting on a comment made by the South African Communist Party in July that government should either tax Sasol, by imposing a windfall tax on extra profits, or nationalise it.
He believes, however, that this view is biased, as the Sasol of today is not the same company that operated during the apartheid years. Instead, it is an independent, profitable organisation that provides many opportunities for South Africa, despite the perception held by some that it is exploiting South Africa’s mineral resources.
Sasol was established by the South African government in 1950 to commercialise coal-to-liquids technology.
“South Africa was in danger of running out of fuel, owing to economic blockades and sanctions because of its apartheid policy,” Prevost explains.
It was an emergency measure to ensure South Africa would become sustainable as a fuel-producing country. To ensure this, all other fuel producers were obliged to buy a certain percentage of Sasol’s fuel and mix it with their own.
When Sasol became profitable, government withdrew its subsidy and allowed Sasol to freely compete and produce, resulting in the company becoming the successful petrochemicals giant it is today.
Prevost states that, as a result of its history, size and profitability, the petrochemicals group is continuously singled out by factions in the African National Congress (ANC) and other political parties and organisations that are in favour of Sasol being nationalised or subjected to a windfall tax.
Windfall Taxes and Nationalisation
Starting four years ago, and mirroring similar dynamics in many other minerals-hosting countries, a faction of the ANC has been vociferously calling for the nationalisation of South Africa’s mines. Government, however, did not approve the idea as it would cause an outcry from mining companies and investors and result in an economic debacle, Prevost explains.
However, amid continuous calls for the nationalisation of mines, government believes it should be reaping more benefits from the mining industry, which is extracting South Africa’s mineral wealth and profit- ing from it.
Government has, therefore, mooted the implementation of windfall and royalty taxes on mining firms.
“Mining is a source of wealth for many millions of South Africans. Mines benefit workers and their families, service providers and the communities surrounding their operations.
The mining industry is the main contributor to South Africa’s economic growth,” Prevost emphasises.
The idea of a windfall tax was first mooted by Australia and, while it has been discussed and investigated by many countries, it has never been implemented, he notes.
“Currently, this is only a proposal that has been presented by the Department of Mineral Resources but it could become a reality in future,” he states.
In February, a study commissioned by the ANC rejected mine nationalisation but favoured higher taxes and royalties.
The report is expected to be adopted as policy by the ANC in December, after it was tabled at the organisation’s five-yearly policy indaba in late June. This followed its raising in early February at a meeting of the party’s national executive committee, Business Day reported, without revealing its source.
The ‘State Intervention in the Minerals Sector’ report warns against “asset grabs” by the State because such a policy would be unconstitutional and contravene bilateral trade agreements, and government could also not afford to buy mining stakes.
Meanwhile, a task team appointed by the South African National Treasury to investigate the possibility of levying a windfall tax on Sasol, concluded in 2007 that the company should not bear additional taxes against its windfall gains.
The outcome of the study was followed by a statement from former Finance Minister Trevor Manuel in that same year, declaring that, regrettably, a windfall tax on Sasol should have been imposed when it had announced an 86% increase in first-half attributable earnings from the previous year, 2006.
However, in July 2008, the spectre of the possible imposition of windfall taxes on South African resource companies was brought to the fore again in a new economic assessment of the country by the Organisation for Economic Cooperation and Development (OECD).
The 140-page study, which was jointly released by OECD secretary general Angel Gurría and Manuel at a function in Johannes- burg in July 2008, indicated that a case could be made for the tightening of fiscal policy to sustain a budget surplus as a safeguard against macroeconomic instability.
“Over the longer term, there may be a case for introducing a fiscal rule, or a more systematic way of capturing commodity price windfalls,” the study concluded.
However, Prevost states that, if Sasol is subjected to a windfall tax, its profits will be severely curtailed.
“On the one hand, this will give more money to government, but at the same time it will cut down on its tax revenue as mines pay tax on profits.”
He emphasises that, while government feels it should receive more revenue from the mining sector, extra taxation is likely to destroy the opportunity to create more wealth from this sector for South Africans.
The windfall tax is also likely to dissuade potential investors in the South African mining industry.