Tuesday, June 17, 2014

Platinum profits

Academics making mischief with metrics

It will take a very long time for the dust to settle even after a resolution of the platinum strike. Many of the scars are permanent with the country’s longest and most costly conflict marred by murder, violence, politics, power mongering, ideology, rancour and simmering resentment that has moved it far away from what should be achieved in any accord – ensuring the survival of the company or industry itself and a better understanding of mutual aspirations and expectations.

The most critical task will be the rebuilding of trust between the parties and a resolve to digest what was said and done during the dispute. Against this background one could question the timing and relevance of a research paper compiled by academics from Wits and Manchester Universities called “Demanding the Impossible? Platinum Mining Profits and Wage Demands in Context.” (See paper here). The question in the title is highly provocative, implying that conditions of the past are transferable to the present. It is a subterfuge that prosecutors often use: if you want to avoid accountability for a statement, pose it as a question.

Challenging this approach does not detract from valid questions around profit maximisation and short term shareholder value criteria. Of course, one could argue that the mines should have considered deploying the revenue streams of the fat years differently. But to remotely imply even as a question that this can be done retroactively is disingenuous and counter-productive.

As fascinating and enlightening as the profit analysis of the platinum producers is, in the end it is simply academic. It’s relevance could have been challenged by even the most junior financial journalist, let alone one who has worked underground, was exposed to mining for more than fifty years, spent decades in championing the empowerment (not only rights) of labour as a major contributor to wealth creation, consistently questioned obsession with profits, and since the early 1990’s has argued for flexible pay under the principles of common purpose and common fate in business.

While the researchers concede the validity of the industry’s figures which show that they are currently cash strapped and struggling, they accuse them of being selective in focusing only on a narrow time frame of the last few years. Ironically, they then similarly select a time frame of between 2000 and 2008, to illustrate “super” profits when much higher wages could have been afforded.

One simply cannot think of mining in that fashion. It is more than cyclical – it is erratic and unpredictable demanding very large amounts of speculative capital to be ploughed into what is essentially a wasting asset. One also cannot lump all the metrics together at a mining house level. This hides critical factors such as reserves, grades, operational risks, cross subsidisation of marginal operations and features unique to specific mines or even specific sub-operations.

Admittedly, the mining industry has much to answer for, including the calcified lungs of my own father. But on a social scale, there are debilitating legacies such as lack of people development, dysfunctional communities, the devastating effects of migrant labour and environment destruction. On the other hand the industry can claim to have achieved many positives, ultimately consigning all the pros and cons to the academic playground of historians who still today are arguing about whether the industrial revolution was good or bad for mankind.

The unanswerable question the mining legacy, indeed even the broader legacy debate raises is simply: how does one address the past without destroying the present and the future for most if not all? That same “what if” can be applied to the research paper: “where would the industry be today if it had given a large chunk of its ‘super’ profits in those eight years to fixed and exponentially increasing pay?”

One could hypothesise endlessly on things such as what effect higher wages would have had on government revenue, capital expenditure on mining development and exploration, and dividend income to pension and provident funds benefitting ordinary citizens. The distinctions between profits, “other profits”, capital expenditure, reserves and dividends are not always clear, leading at times to overstating direct shareholder benefit.

There is one flaw in the presentation of wealth distribution which is common to the conventional value-added statement. That is the inclusion in wealth creation of depreciation and interest as part of “providers” of capital. As reflected under a Contribution Account, they are better allocated to outside costs, which would have a material effect on the wealth creation figure and change the distribution percentages as well.

Like many of these research efforts, they are good at gathering data, diagnosis and interpretation, but rather short on solutions. Many seasoned mining journalists and those close to the industry could be forgiven for concluding that the compilers demonstrate a less than adequate understanding of the vagaries of mining. The brief conclusion moots rather vaguely an “orderly” restructuring of the sector to ensure higher wages.

They also suggest the imposition of Resource Rent Tax to heavily tax any profits above what they call a fair rate of return of 15% -- this at a time when the Edelman research has found that only 17% of informed South Africans trust the government to do the right thing, while 63% trust business to do the right thing. There is simply no guarantee that the extra revenue to the government will improve the lot of workers at the mines more than what the mines themselves are prepared to do. I personally would rather see employees get that money than the government.

There is one very significant contribution this research has made to South Africa’s labour debate. It was screaming at the researchers from their own conclusions and is the clearest evidence yet that the answer to destructive wage disputes in this country lies in variable pay in the form of real fortune sharing (see article here).

Why did they miss it? Perhaps it was beyond their expertise, or perhaps it may have required much more research and reflection. What is true is that both capital and labour have to make some tangible concessions in fortune sharing and both find far greater comfort in the current commoditisation of labour. Organised labour structures, especially leadership, benefit from the "war" with capital while workers simply become political cannon fodder.

But let us use the researchers’ own figures as shown in the graphics below. If workers were on fortune sharing, in which optimum distribution (meeting the legitimate expectations of all the stakeholders and encouraging continued contribution) was determined say at 40% of wealth creation, they would have received 37% more income in the 2000-2008 period. If this share remained the same for the 2009-2013 period (which it should have under a well-designed fortune sharing agreement) they would have received 31% less in pay than they did in the previous period, reflecting the changing fortunes of the industry as a whole.

It is both as simple and as difficult (not complex) as that. What a healthy fortune sharing scheme needs is awareness, understanding, transparency and realistic expectations. None of these are insurmountable.

Realistic expectations are a critical factor. This means that it is extremely difficult to introduce fortune sharing when times are euphoric and expectations inflated. It is better done in difficult times when expectations are modest and when it becomes easier to consider in exchange for greater job security.

The platinum industry has a window of opportunity right now, to introduce what could be a ground breaking approach to labour relations in South Africa.


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