Economy

In any other developing country he would have been showered with plaudits; in South Africa, however, on an economic roll now in its third year, and regular visits to the tuckshop have become the norm. This year the business sector wanted to know why they hadn’t received a tax cut, the poor clamoured for more financial attention, no dent was made in the current account deficit, further relaxation of exchange controls was ignored, no mention was made of ideas to address the clumsily heavy rand, steadily crippling the mining and manufacturing industries, and money to combat the skills shortage wasn’t given a mention.

If you can ignore these oversights, then it was a budget to write home about. The fact that South Africa is to spend R112,5bn (about $18.5bn) on infrastructure in 2006/07 with the largest portion of this spending some R37,6bn to be spent by state-owned enterprises, is an encouraging means of both addressing badly needed infrastructure upgrading and new installation.

The 2006 budget allocated an additional R34bn over baseline for capital projects over the next three years, while overall growth in infrastructure expenditure had increased at an annual average of 11,4 percent between 2002/03 and 2005/06. The R372bn medium-term estimate represented an average annual growth rate of 14,2 percent.

South Africa is a country of extremes when it comes to the untrammelled making of money by big corporations and Manuel’s dilemma is how these companies should be taxed, without wringing the neck of the golden goose. Corporate behemoths Sasol and Mittal Steel are such thorns under Manuel’s saddle.

The fact that the taxman is thinking about slapping a ‘windfall tax’ on synthetic fuels producer Sasol has produced dismay in some business sectors, both at home and abroad, and glee amongst the nation’s motorists who accuse the parastatal of making gross profits at their expense. In forwarding the possibility, Finance Minister Trevor Manuel did not explain exactly why ‘windfall tax’ should apply specifically to Sasol and not to other companies who make massive profits in a similar roundabout way.

It’s well known that Manuel is seriously irked about import price parity (IPP) and is bustling about trying to stamp it out. Is there a connection between the windfall tax Sasol may have to pay and the process of IPP, the champion of which is steel giant Mittal, formerly Iscor. That company prices its products as if they’d originated from abroad and slaps on ‘import parity’ transport and freight charges, equivalent import duties and everything else that makes imports expensive. That means high steel prices for South African buyers ands whopping profits for Mittal. That’s not right, scolds Manuel, over Mittal’s protests that it’s an international practice.

How is this similar to Sasol?

The cost to Sasol to produce one barrel of synthetic oil is reportedly $17, and yet it sells the petrol distilled from that barrel to hard-pressed South African motorists as though it were made from imported crude oil at, say, $60 a barrel. The argument is that why doesn’t Sasol decrease its price of home-made fuel for South African motorists, and be satisfied with just a few hundred percent in profit. Their reply would probably be: why should we?

Sasol could sell its distillate on the world market at ruling market prices and dodge the accusing stares of its fellow countrymen. It wouldn’t even have to pay to transport the fuel from Sasolburg to Durban-berthed tankers. It would simply swap its fuel in Gauteng for an equivalent amount made by KZN-based fuel importers and refiners such as Shell, Engen or Caltex, upload it and export it around the world, making even better profits because it has no internal transport costs to worry about. It’s IPP dressed in other grubby overalls. While the government can put the screws on Mittal to ditch its import parity pricing (and has already done so), Sasol’s sudden source of immense extra cash can only be regarded as ‘windfall’, and taxed accordingly.

Is that what Mr Manuel has his eye on? If it is, it’s making Sasol pretty mad, along with other businesspeople and some commentators.

The question they ask is: did Manuel shoot Sasol in the foot?

“The international business community was astonished (with Manuel’s possible intention),” says commentator Alistair Sparks. “Foreign investors, aware of the special value of this South African company, have been pumping money into Sasol. It’s share price has boomed.”

Within 25 minutes of Trevor Manuel announcing that he was appointing a task team to look into slapping a windfall tax on Sasol, two American investors whipped out R440mn (about $75mn).

“Whoosh,” says Sparks, “Gone!”

By the end of the day, Sasol’s share price had plunged 8,3 percent, wiping R13bn (about $2,2bn) off its market value.

“It was the worst blow a major South African company had suffered since President Thabo Mbeki’s attack on Anglo American’s Tony Trahar knocked R34bn ($5,7bn) off that company’s market value in September 2004,” says Sparks. “One can only wonder why our economically savvy government keeps taking pot-shots at our stellar companies.”

This article was first published in Business in Africa Magazine, April 2006. To subscribe click here