Analysis of the third kind
1 October 2014 12:07 (South Africa)
Opinionista Ivo Vegter

The nationalisation canard

  • Ivo Vegter
One of the more appealing arguments for nationalising mines is that doing so will help to reduce unwanted environmental damage, such as pollution and acid mine drainage. Sadly, history suggests otherwise.

We’re always quick to blame the greed of corporations when something bad happens. An accident involving an oil well? Greed and a reckless profits-at-any-cost approach. Acid mine drainage? Maximising profits no matter what the consequences.
The very notion of “profit at any cost” is absurd, since profit consists of revenue minus cost. The idea of reckless greed might be easier to justify in some cases, but not by people who don’t understand what profit is, or why a company earns it.
Politicians like Barack Obama routinely vilify companies for making “huge profits”, to capitalise on this knee-jerk anti-corporatism.

There are three ways to make “huge profits”. The first is by theft or fraud. That, of course, is illegal. The second is rent-seeking, in which companies lawfully take advantage of subsidies, tariff protection, tax rules or exclusive licences. That, of course, is the fault of government that created these market imbalances for companies to exploit. The third is by producing what the market wants and is prepared to pay for. This kind of profit constitutes the sole social responsibility of a company. By this measure, “huge profits” are hugely desirable, not only for investors, but for society as a whole.

Those who make allegations of reckless greed seldom bother to note the extensive work companies do to try to prevent accidents or unintended consequences. If nothing else, they are public relations nightmares and incur the risk of massive legal liability for the company or their insurers.

Big companies, such as mines, chemical plants or oil companies, have entire divisions dedicated to such as matters as occupational health and safety and environmental responsibility. They employ fleets of bureaucrats and auditors and environmentalists and professional nannies for this purpose.

Such departments are complex beasts which have to grasp every aspect of the business. They have to ensure that there are processes in place to avoid accidents, that accurate information is communicated to shareholders, customers, regulators and the general public, and that staff are trained in a thousand and one rules to ensure accidents do not happen.

However, risk can never be entirely eliminated. Progress and productivity are functions of risk. Some risks pay off, and others don’t. Worse, some risks are known and well understood, but others are unknown. You cannot plan for what you cannot foresee.

Therefore, a knee-jerk anti-corporate response to accidents is not only unfair, but a symptom of a failure to think through the issues.

The extreme form of this reaction takes the form of advocating nationalisation. For some reason, there are people who believe governments, being accountable to voters, will serve society better, take fewer risks and fall victim to fewer accidents.
The history of state-owned enterprises, however, show this view to be hopelessly utopian. In reality, their inefficiency more than makes up for the need to pay private companies a profit. They result in higher prices and fewer choices for consumers, and often result in shortages of what they produce. Eskom is a good example.

Besides the purely economic reasons to distrust nationalisation, the environmental record of state-owned industrial concerns is abysmal. Eastern Europe’s Soviet-era mines and factories offer magnificent examples. Many of them freely polluted, producing vast regions of environmental degradation the likes of which has not been seen outside the mind of Charles Dickens.

State-owned concerns operate with much less accountability than private companies which have to answer to customers, shareholders, auditors, regulators and the public at large.

Acid mine drainage offers a topic local example, since some of those who call for mine nationalisation have used this as a good reason to do so.

Although it was hard to anticipate the extent of the acid mine water problem 20, 50 or 100 years ago, nobody disputes that it has turned out to be a very serious issue today. It has significant implications for agriculture, tourist attractions, and the drinking water supply.

However, if South Africa’s mines had been state-owned, would they have foreseen this problem any better than private mines did? Would they have invested more in prevention, or remediation? When remediation did become necessary, would taxpayers have suffered, or only private shareholders who willingly took the risk of investing? Or would the government simply have decided that the country has other priorities in more urgent need of public funds?

When the government is both referee (regulator) and player (state-owned enterprise), what does this do to the notion of independent oversight, aimed at protecting the property rights of others in society from infringement by pollution or industrial accidents?

Now, the Council for Scientific and Industrial Research (CSIR) is proposing remediation efforts. Despite being a government entity, it takes a far more open-minded approach towards private companies, ultimately hoping that remediation proposals will lead to “enterprises that will provide economic benefits while dealing with the environmental problems”.

One such enterprise, commissioned by DRDGold a few years ago to look into the problem, is Western Utilities Corporation (WUC). According to Business Report, it has invested R75 million in assessing the scale of the problem and possible solutions. The CSIR says it is planning a water treatment plant to produce industrial water, drinking water, and various chemical byproducts for reuse.

The editorial in Business Report, however, castigates WUC for not releasing the results of its research to the public domain.

“[That] would be throwing away the bargaining chip it still holds for its own commercial solution. And that is probably of bigger concern to a private firm than preserving supplies of clean water,” write the paper’s Ingi Salgado.

The first sentence is correct. The second is laughable. It’s like saying a bakery is more concerned with making a profit than with baking bread. The private firm intends to be paid to preserve supplies of clean water. These notions are not mutually exclusive. In fact, one is a direct incentive to achieve the other.

It is commendable that the CSIR foresees private solutions to the problem, since this implies multiple competitive solutions can be tested against each other for efficiency, and the failure of the less efficient solutions will come at no cost to the taxpayer.

If the acid mine water problem is to be nationalised, which would have been the case if the mines themselves had been nationalised in the first place, the taxpayer would have to start by paying WUC for the cost of its work, rather than demand slave labour. Then the government can employ someone with perfect job security and no incentive to be efficient, to try one potential solution at a time, one after the other.

The best-case result of trying solutions in series is equal to what the private sector can do by trying solutions in parallel, with the exception that taxpayers take all the risk and private investors take none. The more likely scenario, however, as years of bitter experience with state-owned enterprises show, is failures, delays, corruption, budget overruns and unintended consequences.

Billing the mining companies for what neither they nor anyone else foresaw, in the hope of recovering the cost of such a nationalised remediation effort, may satisfy some anti-corporate need for vengeance, but emotional satisfaction is cold comfort when you still don’t have a solution to the problem. DM

  • Ivo Vegter
IvoVegterBW

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He approaches issues from the perspective of individual liberty and free markets. He grew up in the deep south of Johannesburg, and learnt his politics reading the Weekly Mail and Vrye Weekblad at Wits University during the early years of the country's transition to democracy. He recently left the city for the lower cost of living of Knysna, where he continues to write about everything under the sun. He is always right.

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