Categories
Current South Africa

Unhealthy assumptions

How the new National Health Insurance (NHI) proposal for South Africa is based on the wrong assumptions, with likely dreadful consequences.

The arguments for the NHI are wide and varied. The Gauteng MEC for health, Brandile Masuku said that the quality of private healthcare is a myth, ignoring the fact that whoever has the means, will spend a lot of money to opt for private healthcare instead of public healthcare.  He also said that the new NHI would also service migrants. That would surely lead to a massive influx of medical migrants from dysfunctional states, Zimbabwe and the DRC are coming to mind. Judging by the hostility of locals towards foreign spaza shop owners, and the regular looting and violence because of it, it is hard to imagine that they will be any friendlier towards thousands of patients who would que up to get health care in South Africa. Besides these non-sensical rhetoric, there are more fundamental problems.

Before we analyze those, we would need to see what South Africa currently has. As per the constitution, every citizen must be able to access healthcare, rightly so. The state runs about 400 health care facilities which include clinics and hospitals. Even though they are mostly free, they are poorly managed, understaffed and under-supplied. Specialists are far and few. They often opt to work in the private environment, where they can work in a better managed environment and charge much higher prices. This seems to be a particular thorn in governments view. They complain that in prevents poor patients to have access to them. Because the health care system is in such shambles, the private health care industry seems to be thriving. Wealthier citizens take out relative expensive private healthcare insurance to be able to cover the cost of any potential emergency.

One of the main arguments government sites is that 4.5% of GDP is spent on private healthcare servicing only 16% of the population, while only 4.2% of GDP is spent on public healthcare servicing 84% of the population. In in other words, R139bl is spent every year on private healthcare, while R130bl is spent on public healthcare. Simple math’s (also in short supply these days) dictate that to bring the public healthcare up to the private standard would cost R868bl annually, or 47% of the governments current budget, an increase of almost 400%.

This obviously assumes that the government performs as good as the private sector in implementing the roll out of better health services. Their track record of managing their SOE’s and institutions don’t suggest that. Looking at the cost overrun experienced at Eskom, and assuming that they have learned from their mistakes, one must still assume that the cost of the NHI would be north of R1 trillion per year.

So how would the government fund it? There is no clear answer yet. Those who came up with this idea probably assumed that private individuals, who currently have a private medical health insurance must contribute their premiums to the NHI fund. The NHI would in future be the sole “purchaser” of medical procedures. (Warning lights would go off now with anyone who has studied Porters 5 forces). This assumption is flawed and has some dangerous consequences.

Firstly, the NHI by itself would not make the medical services provided to the 84% of the population any better. They get a poor service because the government is not paying enough to attract professionals into the public healthcare industry.

This leads us to the second problem. If, as the sole purchaser of health care procedures, the NHI assumes that they can reduce the fees they pay to doctors, nurses and specialists, they would simply emigrate. The world is in an unprecedented development phase, where skilled professionals are in desperate short supply. Doctors who can’t earn a decent salary here would simply emigrate. There are enough opportunities elsewhere. So what? We have already a massive shortage of skills, and we are no where near at producing enough doctors to fill the gap.

Hence the third prediction. If there is a bigger shortage of doctors, those remaining will demand a higher pay. It would be outside of the NHI, maybe another industry will emerge or they will simply just accept cash. But this is then viewed as just another informal Tax for the ability to live in South Africa. Surely more of the population that can afford to emigrate, will do so. And those are the Taxpayers South Africa so desperately needs to pay the government bills.

Besides the skills implosion, there are other problems with the NHI, like mismanagement and corruption.

The main drawback though is that the NHI doesn’t tackle the problem it is set out to archive. It will not make a better healthcare system available to the 84% currently under-serviced. The reason is simple. The best preforming hospitals are mostly in the main metro-pole areas, like Cape Town, PE, Johannesburg and Durban. Farmers in the Eastern Cape for example don’t necessarily have the means and the ability to travel thousands of kilometers to one of the good hospitals. But they do have a nearby clinic, which is likely to be understaffed and under supplied. Surely it is better to improve the performance of the 400 state facilities than threatening to tear down private healthcare. Would it not be better for the farmer to be able to go to his nearby clinic and see a qualified doctor, and get his medicine right there?

Maybe the government should be looking at working with the private sector to improve their facilities. One could imagine a scenario where in order of getting a license to build/operate one private hospital, the company needs to manage one or two public hospitals as well. The performance of those public hospitals will determine if the license to run a private hospital gets renewed on a 5-year cycle.

The South African government need to learn to harness the efficiency and expertise of the private sector to contribute to the public sector. Don’t target successful private companies because of your own failures.

Categories
Current South Africa

Steinhoff revisited

Now that a have a bit more clarity on what happened, I thought it might be a good time to revisit the blog posts I wrote more than a year ago, when we were working on myths and assumptions. Many of my predictions turned out to be right. The company as a whole was not deceitful, but fraud was committed by a few insiders. I also still think that it is ludicrous for most shareholders to sue for their losses, as I explained in the posts.

If I was the defense lawyer of Steinhoff, I would question the logic of investing into Steinhoff in the first place. Fund managers are being paid handsomely to do due diligence on potential investments and use their superior intellectual skills to flag any potential pitfalls in the investment case. They have failed miserably.  

There are a few points Steinhoff’s legal team should focus on.

  • Why was none “overweight” Steinhoff prior to Christo Wiese buying a stake in Steinhoff? Steinhoff was very acquisitive before then, and there could have been lots of reasons to buy it. It was however off the radar of the big fund managers, because the financial statements were always very messy and not transparent and better left alone. That sentiment changed rapidly when Christo Wiese took a stake.
  • What due diligence did the fund managers do? There were numerous indicators which failed to highlight Steinhoff as an attractive investment. Take return on capital. It was far below that of its competitors, even though the return on equity seemed in line, indicating that the return was generated by a highly leveraged balance sheet, another warning sign.
  • I assume that the leverage was created partly by loans against over-inflated property values. What due diligence did the debt investors do? They should be thorough with their investigations and normally have industry experts on hand to confirm any variables. Surely they should have picked up the abnormalities?
  • What synergies did the investors expect to come from diverse businesses such as Poundland, Conforama and Tekkie Town? They would not be able to share a marketing or buyers team or even a distribution network. Before Steinhoff started diversifying horizontally, they focused on vertical integration, which makes a bit more sense. But even then, it takes time to integrate any new acquisitions. What enhanced earnings growth did the fund managers expect from these acquisitions, which in hindsight don’t appear to be there at all.
  • Why was the purchase of Matrass Firm in the USA not a big warning flag? Steinhoff paid almost double the price the shares were trading at, for a company that was on the edge of bankruptcy. More importantly, how did the fund mangers expect Steinhoff do add so much more value to the purchase? Should they sell cheap cloths or shoes through the chain of bed stores? Any decent fund manager would at that time have sold their holdings, because clearly Steinhoff was taking advantage of their expensive shares to buy anything that moves, and anything that doesn’t, in case it moves.
  • Why did no fund manager exit their positions when it was announced that the German Tax authorities raided some of Steinhoff’s German offices 2 years before the eventual crash? And why did they compare reports in the reputable and serious “Der Manager” Magazine to reports in “Noseweek”, and lough them off as sensationalistic journalism?

I think that most invested in Steinhoff purely on the belief that Christo Wiese, the retail magnet with the Midas touch would have done his thorough research before investing. That was a mistake. It is unclear how much research he did, but as the biggest looser from the fallout he would have probably liked to have done more. He might have been sweet-talked into the deal. Once inside, he was not only handsomely rewarded as a highly paid chairman, but also with all sorts of deals on the sideline, from renting out his planes to Steinhoff to purchasing debtors books. No wonder his focus was not on the integrity of the business, but rather on the added benefits of being the biggest shareholder, chairman and direct access to the fraudster-in-charge. Does he deserve to get compensated for his losses? It is a bit trickier, but I would think not, purely because he was the chairman and as thus is the ultimate person in charge of protecting the shareholders investments.

Lastly, the size of the claims is insane. Like I said in previous blog posts, it is absurd to claim losses for investments if you paid R60 per share that, even with the misstated figures of the financials could arguably be only worth R20. The only thing that the lawsuits do now is hinder the company to get back onto its feet, and by clouding the future prospects and therefore limiting their access to capital.

Categories
Namibia

Lost direction

Are street names part of history?

Namibia’s countryside is as harsh as it is picturesque, lush but inhospitable and the wildlife is magnificent even though they are in a constant fight for survival, confronted with droughts and floods. As diverse as the natural beauty is, is Namibia’s history. Unlike West Africa, North Africa, East Africa and the very Southern Tip of Africa, for centuries it was largely ignored by European and Asian Powers. The only resident tribes were the San, Nama and Damara. In the 14th century they were joined by the Bantu speaking tribes, who came south from central Africa. There were a few European and South African traders that travelled through present day Namibia, but the lack of natural ports and the desserts to East, West and South made it a very risky destination.

But the world took notice when diamonds were discovered, and soon afterwards a reluctant Germany send in troop to colonialize the country (partly as a countermeasure against the expanding British empire). The rule lasted only 30 years, because the end of the first World War marked the beginning of the South African rule. But then, finally in 1989, Namibia gained independence. For the first time was ruled by Namibians themselves. The history reflects the culture of Namibians, which is rich in diversity, built on strengths of individual backgrounds.  There is no single cultural history, expect that the combination of all of them is the Namibian history.

Over the last few years, the government, in particular the Windhoek municipality has been going out of their way to attempt to re-write history. They seem to think that by removing statues and renaming existing streets, the reflection of history will change. It will not.

Statues, Monuments and Street names are there to remind us of where we came from. Some are reminders of how we overcame difficult periods, moved on and created a more inclusive future. Some are celebrations of achievements. Nations across Asia, Europe and America is full of such tributes, reminding everybody of the good times and the bad. But in Namibia we seem to want to erase the past and pretend another is the reality.

This leads us to the renaming of the Bismarck street. Otto von Bismarck was recently named as one of three most remarkable leaders of all times by the Economist Magazine. Even though he was not a king, he foresaw that the only way the Germanic European kingdoms could regain their powerful position as the Anker of Europe, was by combining all the kingdoms and forming one unified country, known now as Germany. As can be imagined, dealing with so many kings was no easy feat, especially since he was no king himself. His vision of a united Germany and a flourishing future was stronger than any of the individual battles. Bismarck then dedicated himself on keeping peace in Europe, which in prior centuries has been ravaged by endless and needless wars. It is this vision of a united, more prosperous and peaceful future, which Bismarck is applauded for.

To remove the memories of such a remarkable statesman clearly can’t be for ideological reasons. It seems more likely that the renaming is part of a wider removal of any association to the German history, even though Germany has been a close ally for years, and Namibians from German descent have been a major contributor to the economic development of Namibia. Even though their heritage originated in Germany, they are distinctly Namibians. Or are they? It seems like some in government are targeting minorities, especially the German speaking population, who’s history they would like to erase from the Namibian history. But it is the multi-culturism that makes everybody Namibian. There is no single tribe called the Namibian, but as a collective we are all Namibians. Therefore, all of our histories should be respected, because that is our identity. It is foolish to target one minority. Such actions have never ended well.

It is off course understandable that the current government would like to honor struggle heroes from their own ranks and modern-day leaders. To name a street after them, seems to be a good remembrance. But that is best done by naming streets or buildings that the current government has built. It would reflect the accomplishments of what is possible because of the dedication of those remembered. 

Categories
Current South Africa

Cry, the beloved country

Like a pack of hyenas smelling blood, there is a crowd out there who will do anything to hunt down Cyril Ramaphosa and destroy him and what he stands for. They are aggressive, disingenuous and hypocritical. At worst of all, many of them are from within the ANC, spurring a vicious factional battle.

Cyril Ramaphosa, South Africa’s president, came to power promising to crack down on corruption and setting the country on a new path of growth, the so called “new dawn”. This after nine wasted years under the previous president Zuma, who’s only notable achievement was how long he could stay out of the courts while 700+ charges against him were tangled up in the court system. Besides that, the period was marked by the amount of money that flowed into fraudulent schemes. The beneficiaries were routine passengers of the gravy train, like the Guptas, and reputable international companies such as McKenzie, SAP, Bain, KPMG, Hitachi and China South Rail. Billions of Rands were stolen, which could have been spent on education, health, infrastructure, security and helping the poor.

Ramaphosa vowed to crack down hard on corruption and mismanagement, encourage investments into public-private partnerships and bring down the disastrous unemployment rate. The expectations were high, so were the leading indicators. But the reality of health of the economy paints a grim picture. The business confidence is sinking again, the economy is close to its second recession in two years and unemployment is edging even higher. Cape Town is now known for the extremely high murder rates (thanks to its gang wars) and the army is now patrolling the streets of the Cape Flats, something they haven’t had to do since the early 90’s.  Tourists are staying away which in turn is playing havoc in the housing market (due to the high amount of Airbnb’s staying empty).

The president’s biggest battle will surely be Eskom (the monopolistic electricity supplier). In its current state, it is a ticking timebomb for the fiscal stability of South Africa. Eskom charges almost three times as much for electricity as they did ten years ago and sell less. Currently they are not able to cover their operating costs and interest expenses. They are overstaffed by as much as 30% and their new power stations are being built behind schedule, over budget and are plagued with design flaws. It is a fiscal sinkhole, that could drag the whole of South Africa down. The government needs to take bold and decisive actions, which will set them up on a collision course with the powerful trade unions. This should be Ramaphosa’s Thatcher moment, where he takes a firm stand against the Unions who continuously demand higher than inflation wage increases, even if it means that more people will have to lose their jobs for the companies to stay competitive.

Ramaphosa needs a strong backing to drag South Africa out of this mess, but some of his own comrades have got nothing better to do than being treacherous and backstabbing. Ace Magashule , the ANC general secretary reads out press statements that differ from those agreed to by the leadership, and he takes every opportunity to incentivize disruption among their own ranks. This suits Malema, who is the commander in chief of the fascist EFF, the third largest political party. The Public Protector, who was found by the Constitutional Court to have lied under oath and acted in bad faith, wastes no time to find any possible reason to file a charge against anybody involved with fighting state capture. Gordhan was charged with a bogus offence that has been twice dismissed by the courts, Ramaphosa is charged with lying about a donation (even though he immediately corrected the mistake) and money laundering, which is outside her jurisdiction. No wonder Gordhan said at a conference I attended last year that the fightback against the state capture will be one of the hardest battles he has ever fought.

We are at a crossroad now. Either South Africans stand behind Ramaphosa, support his strategy to clean up the government, prosecute those involved in state capture and focus on getting the economy more competitive again. In that case, South Africa will have a bright future, with many opportunities. Or the hyenas win, in which case there will be a lot more carnage, think of Venezuela and Zimbabwe. The costs will be too high to contemplate, the hardship too sorrow to handle.

Many South Africans have decided not to wait until the battle is decided. Emigrations are at all-time highs, and it would be negligent not to at least think about a Plan B. Ramaphosa currently is the best option South Africa has, and should enjoy a strong backing by everybody, no matter which party you voted for. If he and his team don’t win the battle, we are going to lose our country.

Is Alan Paton right when he said: “Cry, the beloved country, for the unborn child that is the inheritor of our fear. Let him not love the earth too deeply. Let him not laugh too gladly when the water runs through his fingers, nor stand too silent when the setting sun makes red the veld with fire. Let him not be too moved when the birds of his land are singing, nor give too much of his heart to a mountain or a valley. For fear will rob him of all if he gives too much.”

Categories
Current International

When the joker takes control

I am not talking about the psychopathic supervillain, who was disregarded by society as he terrorised Gotham City, but about Boris Johnson, the newly elected Prime Minister of the UK. He has not been to Gotham City, but was the Major of London. In fact Boris has (hopefully) very little in common with the supervillain except for the fact that both are goofy pranksters, and both do like to dramatise everything. Boris Johnson though has been the joker of the Conservative party, somebody who is widely adaptable to mould himself into the solution for any given problem.

He is seen as the savior against the sudden rise of Nigel Farage’s Brexit party popularity. He is seen as anti-establishment, even though it was the deepest establishment that voted for him. He seems to model himself on Churchill. Johnson is charismatic and proudly English, able to connect with a wider audience and not shy to stretch the truth to make his point. All those are qualities the previous Prime Minister, Theresa May didn’t have. His performances of his previous two official posts though were in stark contrast with another.

Boris Johnson did remarkably well as Major of London. He was not only well liked but also seemed approachable and normal, often cycling to work with an ill-fitting helmet. But his chaotic nature superseded any other trait when he was the Foreign Secretary. He failed to gain any respect among his European colleagues and proved to be largely ineffective. That surely only hardened his stance as pro-Brexit. These days he seems so determined to leave the European Union at any cost, that a no-deal Brexit seems to be his base case.

Because of this, he, more than anybody else, would be able to get the Europeans to agree on more concessions. Let’s see if the Boris show is all about the art of negotiations or just showmanship. If he doesn’t get a better deal, the government could collapse, and he would go down as the shortest serving Prime Minister of the UK.

Should he succeed in finding a palatable compromise and thereby saving the UK from economic self-mutilation, he could go on to be a memorable Prime Minister – provided that he surrounds himself with the most talented and hardworking executive to make up for his short coming.

It will be interesting to see, if the second Prime Minister chosen in the last 3 years, not by the people, but rather by a few old men is able to turn this democracy around.

Categories
South Africa

What is our potential?

Last week Lesetja Kganyago, the South African Reserve Bank Governor, announced that they are cutting the repo (lending) rate by 0.25% to help the stressed South African economy. That’s seems too little to give the economy a real boost. But what he said next could give the economy a substantial boost. Mr Kganyago said that government should do its bit by delivering long-promised structural reforms. Only with structural reforms can the potential economic growth be lifted from its current dismal 1.05% to the targeted 3%. There is one obvious question: how is potential economic growth calculated?

The potential economic growth is an estimation at what rate the economy should be able to grow over a long term. Naturally the GDP growth rate can vary. Sometimes it is higher than the potential economic growth rate, although this creates stress factors such as higher inflation. That is not a worry for South Africa though, since we are battling to get the growth rate anywhere near our potential.

This leads us back the most basic question: how is the potential growth rate calculated? The potential growth rate of a country is the population growth plus the productivity growth rate. In South Africa’s case, the population growth rate is 1.2% and the median productivity rate is -0.15%. Therefore, the South African potential growth rate is 1.05%, far below the 3% president Ramaphosa promised and the 4% that the IMF suggest is needed to escape the middle-income trap. While it would be foolish to suggest that the answer to the poor economic prospects is to grow the population (although the Zambian president suggested this), it would be right to look at improving the productivity growth. To do that, as the SARB governor said, we need structural reforms.

Productivity growth is made up of the following: capital stock, human capital and technology.

Take capital stock. South Africa is notoriously incapable of using our natural resources efficiently. We largely missed out on the resource boom between 2003 and 2007, and have not increased our output by much since. In fact, most mines have been forced to retrench workers and close mines over the last 10 years, because it has become so unprofitable to mine here. That is mostly due to increasing electricity and labor cost, hostile government administrators and a muddy system of mining rights allocation. But mining has not been the only sector that is underperforming. Our harbors are expensive and inefficient, therefore operating way below their capabilities. The South African Bureau of Standards (SABS) take too long to approve any new product. It is therefore easier to import new goods than it is to produce them here.

The situation is even worse for human capital. Trade unions are demanding above inflation increases across the board. Our schooling system produces some of the worst results of the OECD. We are constantly ranked worst or in the bottom 5, across many measures. Therefore, our labor force is under-skilled and under-qualified. Employment equity prevents merit-based employment.

The only factor holding up our productivity is technology. Companies have been embracing automation and deploying robots rather than humans. BMW’s new production plant in Pretoria is 95% automated. Banks use of internet banking and mobile banking puts them ahead of their European counterparts. And our mobile operators are constantly coming up with new innovative products and channels of distribution, like the recently announced JV between MTN and Sanlam, to distribute life and funeral insurance products.


So what structural reforms are need in South Africa. The obvious ones are in the education sector, where the level of education needs to be lifted dramatically. Teachers should be trained, monitored and compensated according to their performance. Pupils need to be provided the necessary assistance to achieve top scores. In some cases (especially for the poor households) this might include better pre-school facilities, free meals at school and earlier introduction to e-learning. Employment equity laws should be scrapped in favor of pure merit-based employment. BEE codes should not constantly be changed. Business licenses should be given out quicker. And the awards of mining rights must be transparent, quick and not subject to political interference. There are many more reforms needed. But these would be a good start.

If we manage to increase the potential GDP, it would lead to an automatic increase in GDP. And with a higher GDP, everybody is better off. New companies will look to employ new workers who are then able to send their children to better schools. Tax collections would increase, giving the government more money to spend on the poor, sick and elderly. The upsides are endless, but the politicians just need to do more walking and less talking.

Categories
South Africa

Be careful what you wish for…..

The DA has asked the public prosecutor to investigate if president Ramaphosa lied about a R500 000 donation. The result might hurt the DA most.

When in 2017 the current South African president Cyril Ramaphosa launched his bid to become president of the ANC, the campaing needed to be funded. Since he was up against fierce competition, he needed quiet a bit of it. But since the odds were stacked in his favor to take the top job, money started flowing in from all corners of South Africa. The reasons why individuals and business contributed varied. Some did so because they felt it was their civil duty, some probably just wanted somebody else but another Zuma crony to become president. Some thought it might be best to contribute to buy favors, since it worked to well in the Zuma years of plunder. Needless to say, some donations would spark outrage, in particular one from a company called Bosasa, who donated R500 000. As it turned out, they were exceptionally brash about corrupting individuals to win state contracts.

The official opposition in parliament, the Democratic Alliance (DA) has continued with the same tactics they used to help get rid of the deeply flawed Jacob Zuma and asked the public protector to investigate the donation. She in turn took it upon herself to expand the probe and look at all the donations funneled to the Ramaphosa campaign. The wisdom and motives for this is questionable as the public protectors’ competencies are in doubt. However, if she can proof a case for money laundry, mr Ramaphosa might be impeached. There are more than enough shady characters in the ANC who would like to see him go and return to the kleptomaniac days of the past ten years.

The DA meanwhile would have shot an own goal. They would clearly do better in elections if Ramaphosa manages to get the economy growing again, restore the justice system and improve the basic education. Why? The DA is a liberal movement that doesn’t believe in racial segregation and supports selection on merits. They will do better when the population doesn’t have to fight for their basic services, but rather when the population has got a fair education and understands the possibilities of a well governed economy.

Should mr Ramaphosa be replaced as the president by some other self-serving thug, the lost year under Zuma will continue. Far from improving the basic functions of government, they would only get worse as tenderpreneurs target any state entity that is not yet insolvent. Clearly voters would turn to a more radicalized political party, like the EFF at the expense of the DA.

In doing the right thing, you don’t always achieve the right outcome. Ramaphosa is also the DA’s best bet to bring long term stability and prosperity, so don’t shoot him down.

Categories
South Africa

When really bad news still surprises

South Africa has had a lackluster GDP growth rate for the last few years, hardly ever beating 1% on an annualized basis. The quarterly figures were spread from slightly negative to hardly positive. Disappointing growth rates are the norm. But when the most recent GDP growth rates were released, it sent shiver down the spine of the most hardened pessimists. It came in at -3.4%.

The primary sector fared particularly bad, with agriculture recording negative growth of -13.2% and mining at -10.8%. Manufacturing did not much better at -8.8%. For each one there were reasonable explanations why such a poor result is was recorded. Agriculture slumped because of the substantial growth in the last quarter (7.9%), mining and manufacturing were impacted by the power cuts Eskom had implemented, just to keep SA’s electricity grid from collapsing.

All these excuses miss a very important point. South Africa simply failed to attract enough investments. Local businesses are coy to invest given the mediocre prospects; international investors have a whole host of reasons. We however need them to fund new factories, to finance expansion of existing mines and to build new ones. The government can’t drag the economy out of the hole by themselves since they don’t have the finance to do so. They have too much debt curtesy of Eskom already.  But instead of attracting more businesses to expand their local footprint, we are losing them. AngloGold for example, a gold mining company that in the past might have been described as a national champion decided to sell their last gold mine in South Africa. In fact, South Africa portion of the total foreign direct investment into Africa has shrunk. That means that investors are increasingly more willing to commit capital to countries like Kenya, Ethiopia and Morocco at the expense of South Africa.

Investors will be drawn naturally to environments where three factors are prevalent: the ability to generate a descend return on their capital, stable government with policy certainty, and an operating environment which is welcoming and not hostile. We have none of that. Returns have been poor. Many of the more recent projects of listed companies have a cost of capital that is higher than the return on it. The primary and secondary sectors are burdened with very high electricity prices and increasingly expensive labor. Policy goalposts keep on changing. One need to look no further than BEE accreditation, especially in the capital-intensive mining sector (who really need a long-term policy certainty). Land reform blurred the line of whether land should be classified as an asset or liability.  The operating environment is no better either. The Unions are militant and can be very violent and disruptive even if they only represent a minority of the total work force. Visas for skilled foreigners are hard to get and much of the workforce is under-qualified thanks to the dismal education system they had to endure.

So what to do?

Extremely high unemployment, a poorly educated workforce and a stuttering economy dictates that South Africa needs to attract more foreign capital into their primary and some secondary sectors. That means we need to expand the mining industry, which would suit us well since we have some of the richest resource deposits. Land ownership must be guaranteed by the government, and unions should not be forced upon workforces. Collective bargaining needs to stop. There should be Tax incentives for private individuals setting up new businesses, and red tape should be cut to a bare minimum. If need be, foreign professionals should be granted work visas quickly, as they can contribute not only to the growth of the economy, but also by sharing skills with locals.

The South African governments priority should be to make it as attractive as possible to foreign direct investments. Without foreign capital flooding in, South Africa will have to rely on our own pool of capital, that is both finite and scarce. It is now a time where Ramaphosa need to be bold and make it very clear – we want investments and that is our priority.

Categories
International

Brexit negotiations – what can we learn from them?

The ongoing Bexit negotiations led by Theresa May hold valuable lessons for future negotiations, mostly on how not to do it.

During her time as home secretary she made a name for herself as a prudent and competent operator. Even though she campaigned for the UK to remain within the European Union, surely she would be savvy enough get a good Brexit deal approved by parliament.

Mrs. May entered the negotiations overconfident, mistakenly thinking that the UK was in the stronger negotiations position and drawing red lines that were in her mind non-negotiables.

As a Brexit secretary she chose David Davis, for no other apparent reason than that he was one of the strongest Brexit supporters. But he resigned after only a year in the job, which he never seemed to take seriously in the first place. But he was not the only one to resign from team May – she has had 37 ministers resign (and counting). That is more than any other UK Prime Minister has ever had.

Mrs May stuck to her lines and was uncompromising in her approach. She came up with one deal, that was voted on by the members of parliament a few times, and every time defeated by record margins. Even some of her own executives voted against her. Predictably, she ran out of time, and had to go and beg for more time from the increasingly impatient EU.

So, what can we learn about her disastrous negotiation skills?

Firstly, don’t start the countdown until you have a comprehensive plan. It was up to the UK’S Prime Minister to start the two-year period by triggering article 50. When the UK Brexit negotiators met the European negotiators for the first time, they seemed woefully underprepared. If one has the ability to start the clock, make sure you know exactly what you want to achieve in that time period, with different options at hand should the negotiations become deadlocked.

Secondly, make sure that your whole team sings from the same hymn sheet. As the Prime Minister lay out the objectives of the negotiation, and then come up with a strategy on how to accomplish them. Make sure that you have the buy-in from your closest colleagues, so that they can spread one uniform message with the same objectives in mind. Also select team members you get along with. You don’t need to be friends, but you need to be able to spend countless hours working together. Complex negotiations take time, make sure your team gel and don’t get pre-occupied with infighting.

Thirdly, when you draw lines in the sand (or red lines like Mrs. May referred to) make sure that it is out of a position of strength. More importantly make sure that they are realistic. It didn’t help that Mrs. May chose targets that are only of benefit to the UK, not the Euro area. She completely overestimated the UK’s position of strength and didn’t analyze the alternative.

Forth, be flexible. A trait all great leaders had was to be flexible. Changing your point of         view slightly doesn’t mean that you are not fulfilling your objective. It also shows that you are willing to compromise and work towards a solution. Thus your negotiations partners knows you are working with them, rather than against them, leading to a friendlier working environment which has been proven to yield better results. The trick is to list as many objectives as possible, so that the negotiations don’t get stuck on a few major elements, but that it is a fluid motion of give and take. Theresa May is stubborn, uncompromising and inflexible. That caused her to stumble in the negotiations and be defeated in parliament.

Fifth, make sure that you have the numbers behind you. The conservatives had a small lead in parliament when Article 50 was triggered, but the party was split between strong Brexiteers and “Remainers”. Therefore, Theresa May would need the support of some of the opposition party members of parliament. Instead of reaching out to them, she decided to hold a snap election in which she lost the majority in parliament. The results were a clear indication that the not even the public approved of her work thus far. Yet she still didn’t reach out to the main opposition parties to come up with a deal that would pass parliament. Instead Mrs. May continued to thrash out a deal with the European Union, which when it was finally ready to be voted on was defeated by the biggest margin ever. It is simple math’s. If you don’t have a clear majority in parliament, and you don’t have your whole party behind you, your deal will fail, unless it is a combined effort of all the parties involved.

This also leads me to the last point. If you enter negotiation, make sure that your objectives are the objectives the majority of your team, in this case the British parliament, approves of. Once you have that, it is time to start the clock and negotiate with the opposing party.

The Brexit disaster has been a tragedy that is still playing out. The parliament are making a fool of themselves. The debates remind of a tired yawning soap opera that seems to be never ending. The politicians seem to thrive in endless posturing and biggotting. But I not sure if doing what is best for their community is a high priority.

Categories
South Africa

Brait – not all shareholders are equal

Executives of Brait are bailed out, but they insist it is not at the expense of the other shareholders. Is it?

When Brait morphed from a private equity entity to an investment holding company, the management team leading the change were given the opportunity to buy a 18% stake in the new company. They only had to come up with 20% of the value of the deal, the rest would be vendor financed by Brait itself. The shares would be held in a entity called Fleet. As the share price soared, nobody complained. But since then, the management of Brait has made value destructive decisions. That reflected in the share price, which has come down from more than 160 Rand per share to 24 Rands per share. In the meantime, Brait has refinanced the loan with Standard Bank and FNB. Current the value of the loan is a lot more than the security the banks hold, and Brait has decided to settle it. This is essentially worse than what Carlos Ghosn has been accused of by the Japanese prosecutors, when he convinced Nissans board to take on his personal currency swaps which were under water. But we are not in Japan, we are in South Africa. And here the board of Brait decided to issue a statement that the bail-out does not favor executives!

Besides being highly immoral, one must question the behavior this encourages. The board of directors are the custodians of the invested capital and it is their job to protect it and to grow it. Only they can decide where to invest capital. For that, they get paid astronomical salaries. If the capital allocation turns out to be poor, they should be the ones to take the blame. In Braits case, they were greedy and possibly over-confident to take such a large  loan. Bailing them out when the share price comes tumbling down essentially means that they were able to take a leverage position with unlimited upside, but no downside. Evidently it leads directors to take unnecessary risk without considering the downside.

Brait is unfortunately not a unique case. Pepkor recently bailed out their executives, costing the company a few hundred million Rands, when their Steinhoff shares collapsed. Adept IT is considering issuing new options to their executives (at a lower strike price), because the last few were at such a high strike price that they would not be worth executing any time soon. Off-course, the reason for that is because the share price decreased from more than R15 to R5.11 in about 2 years. There are more examples, a few that are more complex, like the recent change in incentives at Woolworths. Their executives are rewarded on the return on invested capital, which is a prudent measure. But at the same time, they wrote down billions of Rands of their disastrous David Jones acquisition, which was their biggest bet ever. That means that the executive will be measured from a lowered bar, and not from the high water mark before the acquisition was written down. At least going forward, their measure of reward is in line with those of shareholders.

To understand the unfairness of these incentive deals where Managements are offered very lucrative incentives, only to be bailed out when things go bad, it helps to look at an analogy. Imagine that a portfolio manager invest so poorly, that the unit trust he manages constantly loses value. After the value of the fund is down by 70%, the management of the company he works for feel sorry for him and decide to pay him is performance bonus anyways. But because there is not enough income generate by the fund, the investors in the fund have to pay him by sacrificing some of their own invested capital. No doubt this would cause a total loss in confidence in the portfolio manager, the same should happen to managers who only scheme how they can make more money, even at the expense of ordinary shareholders.

It seems it is not only politicians who get rewarded for a poor performance.