Category: South Africa

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Current South Africa

NHI – just a mirage

True to form, just before elections South Africa’s ruling party, the ANC, promises whatsoever is needed to get more votes.  The last 30 years have proven that the promises count for little and end in failures. The latest such shambles happened yesterday. President Ramaphosa signed the much-critiqued National Health Insurance (NHI) into law. It is nothing short of a fairy-tale.

 The SA government analysed the medical environment in South Africa and determined that it essentially is a two-tiered system. The first is the public health system, funded by the state where the service is poor or non-existent, but it is essentially free to everyone. The second is the private health care system, which is world-class but only accessible to those who have got the means to pay for it (mostly via their private medical insurance). As such, the government wants to make the world class health system accessible to everyone by eliminating private medical insurance schemes and becoming the only buyer of health services (seeing it worked so well for all the communist countries). That is a mad.

Firstly, the only reason why we have such a big and well-functioning private healthcare system is because the government failed to manage the public health care system. The local clinics have not enough doctors, yet young qualified doctors sit around at home struggling to find employment. The buildings are not maintained, and the patients need to sit in long ques to get treatments. The provincial health MEC’s are completely out their depth, and their department is out of talent. When one reads about the horror stories of the Tembisa Hospital, it becomes very clear that most state clinics serve as a cash generator for a handful of dubious contractors and suppliers. Instead of fixing the public health care system, the ANC would rather pull down the private healthcare as well.

Secondly, the reason why only the wealthy can afford private healthcare is because they are able to afford the pricey health insurance premiums. The private medical aid plans are expensive because the regulator does not allow cheap plans to be sold. Across the border, in Namibia, the cheapest Medical Aids cost about R500 per month while the cheapest in South Africa cost three times that, and only because the regulator prescribes minimum benefits.

Thirdly, we have a world class private healthcare system because the rich don’t mind paying exorbitant fees. Thus, the most talented doctors can earn in South Africa what they are able to earn anywhere else in the world. However, most of the rich world is desperate for more qualified doctors and nurses. So, if the SA government thinks they can force the medical professionals to work for less, they will be mistaken. They will just emigrate, and thus their know-how will leave as well. The patients will be worse off because the doctors are not available anymore. Young medical professionals will be worse off because there is a lack of knowledge transfer, and the state will be worse off because they will collect less income tax. Everyone loses, no one wins.

Fourthly, a centralized insurance system has not worked anywhere in the world. The NHS in the UK is a disaster, Obamacare is much more expensive than first predicted and the centralized systems of China and Russia might as well be abandoned. A national insurance could only work in very well regulated environments where the government is trusted. Neither could possibly apply to the ANC government.

Fifth, the funding gap is so large, that the only way to pay is for the Taxes to increase. By world standards, the Taxes in South Africa are already excessive, but clearly the government sees no problem in taxing the population a lot more. Why? Thanks to the poorly managed transport system, unreliable electricity, and militant unions the little bit of economic growth we have experience has mainly been through the consumer sector. A consumer with less money in the pocket will not be able to buy as much, hence the ANC government would have finally managed to shrink every sector of our economy. Thus, the little bit of growth we have had over the last 15 years will completely evaporate and most South Africans will be poorer than they have been in 2005.

Sixth, the fund that will accumulate in the NHI will be so big, and the “suppliers” so many that in no time it would resemble a cesspool for corruption. The state capture inquiry showed know how quickly funds are siphoned off by crooks. Instead of providing healthcare for everyone, the NHI will provide billions in cash for a few. Typical.

It is disheartening to see the ANC turning to populist measures when they struggle to explain to their voters why they deserve to govern again. Instead of improving the state hospitals and clinics, they rather want to bring the private sector down. It is possible to improve the public health system, just look at the Western Cape, which is run by the official opposition, the DA.

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Current South Africa

Better for who?

Unions intentions and motivations are not always clear, because of a perception flaw. What to do about it?

As the unionized workers at the South African Airways (SAA) go on strike, thousands of passengers will need to change their travel plans at the very last minute. Many will forego their holiday in South Africa, affecting many related industries.

On the face of it, the unions reasoning seems sound. They argue that it was not the workers who caused the R26bl in accumulated losses generated thus far, so they should not bear the consequences. The governments wage offer was rebuffed. Instead they are demanding that no jobs may be on the line over the next 3 years. The management of SAA however proposed that just more than 800 jobs will go as part of their turn-around plan.  

This is a familiar sequence of events. Unions drum up support by defending the plight of the workers. They demand above inflation increases in addition to other benefits such as housing and transport. This effectively makes labor in South Africa pricier relative to its peers, and less productive (because the higher wages are not coupled with productivity increases). Although in boom times this makes sense, it is fatal in bad times. Businesses like SAA, that are effectively bankrupt can only survive if they are restructure. This always means sacrifice by all stakeholders. The alternative can be seen in the textile and mining industries. Mines tried to gain efficiencies by mechanizing, and those who failed had to shut down. The textile industry is a shadow of its former self, despite Governments effort to help by levying a 40% import duty on garments from abroad. The job losses contributed to South Africa’s record-breaking high unemployment rate.

So why are Unions still so demanding, even at the risk of pushing the business into ruin?

The short answer is that Unions are businesses themselves. Like a sport club, they prosper if they get more members, and fail if members leave.  It can be a very lucrative business as such. There are about 3 million unionized workers in South Africa. Assuming that they pay about R120/month for their memberships, it means that the “union industry” is worth about R4.3bl, a sum worth fighting for. All you have to do is to fight harder than the next union, to attract more members. And then you fight for your members to not be dismissed.

Long gone are the days of the 1980’s where Unions down tools to fight against an abusive regime, where they fought for the equal recognition of workers and where they fought for basic human rights.

The stranglehold of Unions doesn’t only businesses but also government. The South African government was not even able to implement a pay policy in the education sector where the pay of teachers would reflect their ability to teach. As a consequence, poorly performing teachers get paid the same as those who put in extra effort to make sure that their scholars get the best education possible. This negativity is amplified by the fact that the governing ANC is in a tri-party alliance with Cosatu, a union collective, as well as the South African Communist Party. That means that government policy is influenced by a body that is motivated to do not what is best for South Africa, but what is best for their Unions members. A very precarious position.

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Current International South Africa

Strange times: when non-racialism is racist

Why is somebody classified as a racist when they don’t believe on using the color of the skin to base policies on?

The official opposition in the South African parliament, the Democratic Alliance (DA) is going through turbulent times. It all started with the election of a new chairperson, which the previous leader, Hellen Zille won. Three senior leaders resigning in quick succession. They accused the DA of showing their “real color”, i.e. that of a white racist party. It is a strange claim for a party that prides itself on being non-racist. What to make of it?

When Mmusi Maimane came to power to lead the official opposition, he had a vision of making the party more inclusive. They needed appeal for more support from black voters, who have shied away from voting for them. As one of the main pillars for policy direction, Maimane said there needs to be a recognition of the injustices of the apartheid regime. By default, they will have to support policies like Black Economic Empowerment (BEE) and affirmative action. These policies are the main policies of the ruling ANC to readdress the injustices of the past. Maimane’s policies were mocked as being an ANC-lite version.

The election of Helen Zille apparently was the trigger for the resignations. It obviously doesn’t help that she is a devoted fan of Twitter and as such has tweeted messages that by themselves can be ambiguous.  One such Tweet read “For those claiming legacy of colonialism was ONLY negative, think of our independent judiciary, transport infrastructure, piped water etc.” followed by “Would we have had a transition into specialized health care and medication without colonial influence?”. Both observations are probably right, based on the facts and statistics, but it is not appreciated in a world were most attention spans are no more than a few minutes. She insisted that she was right, but it would be like saying “For those claiming legacy of Nazis and Hitler was ONLY negative, think of the German Autobahns, Rail Infrastructure and the development of the Rocket”. That would also be true, but you would be labeled as a Nazi sympathizer these days. What gets lost in the hype of headline news however is that Helen Zille has for years been a devoted anti-apartheid activist. Her time as a journalist in the 1980’s was spent at exposing police brutality of the apartheid regime during the day, and at night she provided her home as a safe house for political activist hiding from prosecution of the state.

As a fierce liberal she has never compromised on her believes. The only way to develop a better South Africa for all is by developing policies not based on race, but on merit. Those that have been neglected by the racial policies of need more help from the state to be able to succeed. Those areas that were deprived of schools and hospitals are first in line to get a new one built, those areas with a poor infrastructure will get a better one and those areas with a lack of transport will get more buses. As a major of Cape Town and later as a premier of the Western Cape, she has always lived up to that commitment.

Under her leadership, the DA was the only true liberal party in parliament. They believe in freedom of expression, freedom in believe and tolerance for one another. As a multicultural state it is important to recognize that others have a different culture than yourself, which should not make them better or worse. Neither should the color of their skin determine if they get a job or not. Sadly, that is precisely what affirmative action encourages. Indirectly, companies are given targets of what percentage of their workforce must be Blacks. This leads to cronyism and poor leadership, as employees are given jobs based on their skin color not on merit. In the end, it is the poor who suffer once again, because companies like Eskom are so badly run, that after a 500% increase in electricity price, they produce less electricity than 10 years before, and don’t generate enough revenue to cover their debt obligations which have increased almost 5 fold. The state has to continuously bale them out, and billions of Rands are diverted from ministries such as police, education and health to pay for Eskom’s mismanagement. A far greater cost, but harder to define is that of lost private sector investments because of the unreliability of power generation.

BEE also leads to such disparities. As Chris Hani said: “What I fear is that the liberators emerge as elitists, who drive around in Mercedes Benzes and use the resources of this country … to live in palaces and to gather riches.” There is a handful black elitist that got extremely wealthy by “buying” discounted blocks of shares in companies.  Even broad-based BEE deals are not correcting the injustices of the past. It is far more likely that urban employed workers subscribed to the broad-based BEE deals, because they have the knowledge of them and the means to subscribe. A resident of the Eastern Cape hinterland or neglected small village in the Freestate doesn’t benefit from them. Most of the country has not benefited from these corrective policies and probably never will. It is impossible to try and re-write the history, but it is possible to create a better future. And that is what the government should be focusing on.

That is exactly what the DA wants to focus on, a better future for all. Those who can’t afford to send their kids to school, will get help. Those without medical facilities will get medical facilities. And those who are the most vulnerable in our society will get more help. As such, they will form a more productive workforce that attracts outside capital to grow, thus creating more jobs, decent living conditions and a more just and equal society.

So how is that racist? Who knows……

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Current South Africa

Opposition dilemma

The official opposition in South Africa, the Democratic Alliance (DA) elected a new executive chairperson at the weekend. The results were not quite what anybody expected just a few weeks ago. Helen Zille, the former party leader and a fierce liberal fundamentalist, returned out of political retirement to manage the party that had previously tried to sideline her. How did this come about?

During the last few years the oppositions prominence was mainly enforced by the entrenched fight against the corruption, cronyism and mismanagement of the Zuma government. The then president was regularly dragged to court by the opposition parties, who stumbled over themselves to join court cases against the president. Through Zuma’s many shortcomings, he was an easy target and the opposition parties used it to gain voters favor. Now, that the ruling ANC has a new president in Ramaphosa, who seems to be the polar opposite of Zuma, the opposition parties are left in limbo trying to display their relevance. Their true political foundations seem hypocritical; the far-left EFF who purport themselves as the fighters for the poor drowse their thirst with expensive champagne and use money looted from the poor to fund the leaders lavish lifestyles. The leader of the Democratic Alliance (DA), which essentially has been the only constant liberal opposition to the apartheid regime, represent for years by the lone but powerful voice of Helen Suzman, said that anyone who wants to form a “true liberal political party” is welcome to leave the DA. It is confusing, but the DA wants to endorse liberal values but supports race-based policies.

As the opposition parties scramble to find their political compass, lets reflect in broad terms global developments over the last 200 years. Humans have never before experienced such an upliftment in their standard of living. They have never had such freedom to practice any religion they want to, and they have never been able to express their opinions as freely as they can today. Babies have never had a greater chance of reaching adulthood, girls and boys have never had such good prospects of working in the profession they dreamed of. Never before have so many people been allowed to vote so regularly for their political leaders, and never before have so few people had to starve or die of preventable diseases. More people than ever own their own homes. They can afford luxuries like travel and cars or spend their savings on fashion and lifestyle.

All of this was only possible because of the emergence of liberalism as the major political force. The American and French revolutions were based on this philosophy. Liberals believe that everybody is equal and as such should have freedom of speech, freedom of religion and freedom of movement. There should be no racial division or gender discrimination. The government has a central but limited role to make sure that the economy is free and fair, and that the best companies and the most hard-working entrepreneurs and employees get rewarded for it. Policies are based on facts rather than fiction and populations come together to archive a common goal – a more prosperous future for everyone.

No other political philosophy has done more to bring about the good in human societies.

Whereas 80% of world population lived in absolute poverty 200 years ago, less than 10% do these days. In the 1950’s Belgium had a GDP per capita similar to that of Lesotho today.  Ever since the Chinese government adopted more liberal ideas 30 years ago, the world poverty rate halved, the Chinese economy and the world economy has thrived. Whereas communism proved to be a destructor of wealth and well-being, liberalism was the contributor.

What can be so wrong in being a liberal party in South Africa today, especially if you have the credentials dating back at least 60 years? I would have thought that it is easy for Mmusi Maimane to build on that, and clearly differentiate the DA from the ANC and the rest of the political spectrum. For a country still scarred by the racial segregated policies of the apartheid regime, it would be appreciated to have one party that preached the non-racial gospel, one that preached inclusivity and one that talks about South Africans rather than referring to the subgroups based on their skin color.

The ANC-lite policies of Maimane probably caused so many voters to turn to Helen Zille for leadership. It is time for the DA to get back to its roots and make decisions on merits rather than skin color and promote policies based on helping the poor and vulnerable rather than on racial averages. It is time to build a better future for all South Africans, because after all, we are all just that, South Africans.

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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.

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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.

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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.”

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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.