A study commissioned by the Mining Industry Association of Southern Africa on nationalisation backs the creation of a sovereign wealth fund for windfall profits, a notion also endorsed by the African National Congress’s (ANC’s) research document on state participation in the sector.

However, the study, which is not formally being endorsed by the association, differs in many ways from the ANC document. The study, released yesterday on the fringe of the Mining Indaba, warned that direct state involvement in the mining industry was fraught with dangers.

It cautiously endorsed the notion of the government sharing in windfall profits but recommended the state be willing to share some of the downside when prices fall. "It is legitimate for governments to expect mining companies to share the windfall benefits of exceptionally high commodity prices with the communities in which the mines operate. Likewise, governments must be willing to share some of the downside when prices fall."

The report was compiled by Gavin Keeton, associate professor in the economics department at Rhodes University, and economic consultant Mike Beer.

The report said the process of sharing windfall profits would most sensibly be governed through the tax system, but did not prescribe tax rates or what system should be used.

Whatever system was used, it should not compromise the viability of the industry. "It should be remembered the reason shareholders of successful mining companies continue to inject necessary capital into mines, even when times are bad, is precisely because they expect to benefit when prices rise," the report read.

"If this benefit is all taxed away they will not inject funds and mines will contract."

It was critical, however, that the process, on both the upside and downside, was automatic, the report said. Cuts in tax rates should not be delayed until after huge damage had been done, and political acrimony when rates were rising, should be avoided.

Sovereign wealth funds have been successfully used by some countries to combat "Dutch disease" — where the price of commodities exported by a country rises in relative terms, leading to a real appreciation of that country’s currency, which in turn undermines the external competitiveness of other economic sectors, the report said.

Channelling a proportion of these commodity export earnings into an external fund when commodity prices are high reduces the pressure on the exchange rate to strengthen. It reduces tax inflows into the exchequer, removing the temptation to raise spending to an unsustainable level at times of high commodity prices.

It also provides a fiscal nest egg that can later be drawn on when tax revenue from the mining industry falls, the report said.