South Africa's political elite mines nationalization debate for advantage

By Anne Frühauf

Nationalization is the topic of the moment in South Africa and will likely continue to dominate political debate until the end of 2012, when the African National Congress (ANC) will elect its next president. The most likely long-term outcome, however, will not be too far from the government's current incremental approach to tighter regulation, which may be sold as "nationalization by other means."

The debate is largely being driven by political infighting within the ruling alliance. The ANC Youth League (ANCYL) and its populist leader Julius Malema are trying to use the issue to gain traction ahead of the December 2012 party conference, by tapping into popular grievances over economic and racial inequalities that persist nearly two decades after the end of apartheid. The ANCYL has said it will not support any candidates who do not favor nationalization, but its attacks against President Jacob Zuma (also the ANC head) have become increasingly personalized.

Zuma, fearful of alienating key constituencies ahead of his reelection campaign, is unlikely to lay the debate to rest once and for all. Malema won reelection as ANCYL leader in June and he has exploited the issue to maximum effect. Malema presents a growing threat to Zuma, not as a direct successor but as a detractor. His political future, however, may be undermined by investigations into his business dealings and ANC disciplinary procedures. Still, the ANC is finding it increasingly difficult to control the ANCYL. As a result, it prefers to attack the Malema and the populist youth wing on non-core issues rather than by openly debunking nationalization. But even if Malema's political career takes a knock, the nationalization debate is unlikely to fade.

The factional fighting will only intensify ahead of the party congress, and the nationalization issue is easily exploited for political gain. The ANCYL is supported by some African nationalist elements within the ANC. The Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP) are internally divided on the issue but worry that the ANCYL may simply be using it to secure political clout and bailouts for indebted black entrepreneurs. But the unions are equally concerned that the ANCYL is trying to invade their traditional left-wing turf and hijack their popular appeal. Pushed on to the back foot by the ANCYL, they may only give nationalization a lukewarm endorsement.

The mining sector has been the main target. (The ANCYL, however, has occasionally eyed the financial, agricultural, and industrial sectors as well.) But, the various constituencies also differ on the definition of nationalization, and options include expropriation without compensation; expropriation with compensation or alternative measures such as more taxes, royalties, black economic empowerment (BEE) policies, and greater state participation. Possible policy proposals over the next two to five years could include a mining tax like that recently implemented in Australia, and efforts to tighten BEE equity transfer targets. It is, however, far from clear whether the current equity transfer target (26 percent by 2014) will be increased. The government may instead more strictly enforce the existing target. Greater participation by the state-owned African Exploration Mining and Finance Corporation may also form part of this agenda, but the government faces real capitalization and management challenges.

At the ANC congress, party delegates are unlikely to endorse outright nationalization, nor complete rejection. Instead, their resolution is likely to be a muddled middle of the road call for greater public benefit. This lack of clarity is unlikely to reassure investors unnerved, not only by questions over South Africa's long-term policy trajectory, but also the existing regulatory burden. What many in the industry would consider a best-case scenario-a firm rejection of the nationalization proposals and efforts to ease the regulatory burden-is increasingly unlikely given South Africa's political dynamics. A worst-case outcome such as outright expropriation (even with compensation) is limited by constitutional and fiscal concerns, however. Nationalization without payment would result in capital flight and severe economic damage (as in Zimbabwe), while payment for mining assets would bankrupt the government. (For example, the mining industry's current market capitalization of around $270 billion is about twice the government's total budget). As a result, a "muddle through" scenario probably implies no radical departure from the status quo, but may allow the government to sell its policies to disgruntled voters as nationalization by other means.

Anne Frühauf is an analyst with Eurasia Group’s Africa practice.