If the Ramaphosa quest for pursuing economic growth and restoring full investment status for South Africa was packaged as a new venture in January it would have received substantial interest. In light of the tsunami of promises about FDI since then, it may be time to look at an updated “prospectus”.
Indicator: Economic growth is the highest priority
In his “New Deal” Ramaphosa promised to keep “an unrelenting focus on growth”. He stated: “We must be bold and determined. We should be targeting 3 percent GDP growth in 2018 rising to 5 percent growth by 2023.”
Prospectus update:
- In March, Moody’s – the only international rating agency that still bestows an investment grading on SA – kept SA’s credit rating unchanged just above junk status, but with a “stable” rather than “negative” outlook. One of the reasons for this was higher growth prospects that, even if largely cyclical like a spurt due to the easing of the drought, “would allow the government some additional fiscal space to pursue reforms”. The increase in the VAT rate was also considered as a positive sign. (More about how the fiscal space was utilised under the indicator on public expenditure below).
- That was followed by an announcement of a 2.2% GDP contraction in the first quarter of 2018: the largest quarter-on-quarter decline since 2009.
- Reserve Bank Governor Lesetja Kganyago in July slashed the expected GDP growth from 1.7% to 1.2%, a cut of 30%, stating “a deterioration in growth prospects since May”.
EOSA’s assessment: The 3% for 2018 was never on and one seldom got the impression that government made a coordinated effort to facilitate growth. Slow growth gives momentum to downgrading potential. Furthermore, if land under traditional leadership is exempt from expropriation without compensation (EWC) but land with higher per hectare contributions to both GDP and local authority revenues is targeted for such confiscation, the unrelenting focus on economic growth is probably skewed by a bi-focal approach.
Indicator: Creating policy certainty
In the New Deal Ramaphosa was adamant: “Billions of rand leave our country illicitly or because we have created such profound policy and political uncertainty… We need to shift sentiment and quickly. This requires urgent measures to achieve policy certainty, improve institutional stability, restore the credibility of the criminal justice system…”
Prospectus update:
- A quick solution to improve the climate for investment in the mining sector by resolving the Mining Charter impasse was promised: the outcome of that process is still not final, nor is there any indication that the investment taps will be turned on again. According to Sipho Pityana, chairman of AngloGold Ashanti, SA risks driving away new investment and crippling its mining sector if “reckless” new rules are implemented. He accused government for using the reckless Mining Charter of Mosebenzi Zwane as template for the new version, rather than starting afresh. “When the industry says to you that what you are proposing will kill the industry, you should sit up and listen.” Confidence in mining remains undermined…
- The embrace of land-expropriation without compensation undermines property rights and investor confidence. On 26 June Moody’s warned: “uncertainty over how this will be achieved continues to limit near-term investment, and could ultimately lead to a more pronounced fall in investment”.
- See also prospectus section dealing with strategic management below.
EOSA’s assessment: Under Ramaphosa’s leadership policy uncertainty has increased due to the commitment to Expropriation without Compensation. Currently, the biggest certainty is the uncertainty.
Indicator: SA will succeed in luring productive investment
New Deal promise: “We need to massively increase levels of investment from around 20 percent of GDP currently to the NDP target of 30 percent”; and “an immediate priority is to restore confidence among investors”.
Prospectus update:
- Four investment ambassadors were appointed to procure US $ 100 billion FDI. “They have to hunt aggressively like lions for investment…” was the presidential instruction.
- China has turned the tap on with pledges of investment and loans to bail out Eskom: the terms and conditions of these remain unclear. Between pledge and production, a massive gulf exists: try to find today the productive investments by foreign companies in terms of contractual agreements reached as part of the Arms Deal.
- Trevor Manuel (one of the Investment Ambassadors) said their task was complicated by the decision to expropriate property without compensation since investors consider that would harm property rights, the financial sector and food security. “Communicating this [EWC], I think, is a bigger challenge than what we thought.”
- The recent much lauded investment by Daimler (expanding capacity at their East London plant) was planned long before the launch of the investment drive.
- The Saudi’s US$10 billion investment in solar energy (announced during Ramaphosa’s recent state visit to Riyadh) is dealt with in more detail below.
- Mike Schüssler of economist.co.za calculated SA had slid from R1.2 trillion net positive FDI in 2005 to the current negative R1.5 trillion: a net loss in fixed investment of R2.7 trillion! In 2017 net FDI was -31% as a percentage of GDP.). Divestment by SA companies apparently continues unabated.
- Government has just signed into law legislation passed in 2015 – the ill-named “Protection of Investment Act of 2015” ‑ that removes the right to international investor-state arbitration, replacing that with a mere mediation process without right to move onwards to arbitration. Investors will ask themselves how willing a government that confiscates (that is expropriation without compensation) an investment in a mine would be to be persuaded otherwise in a mediation process? The process will be similar to a crocodile holding on to its prey whilst the poor wildebeest presents arguments in a process of mediation why the croc should release its grip… If policy certainty and investment are of importance, a statement that the act as passed was not in accordance with key policy objectives and the need for economic growth, and that it would be revised to rectify those shortcomings, would have sufficed.
EOSA’s assessment: Unlocking international productive investment on scale requires restoration of trust of South African investors. Without that, the productive scene will in future resemble the free goodie bags handed out at the Brics summit in Johannesburg… as John Fraser in The Messenger observed: no Mrs Balls, no rooibos, no biltong, but the bag had a label: made in China… The goodie bag contained “a scarf-like thing, a book, a notepad, not one of those shiny electronic gadgets, but an old-fashioned, 19th Century notebook and pen. Old, old tech… Conference organisers had clearly not done their homework.” One of the Summit themes was the 4th Industrial Revolution. “Judging by the Summit screw-ups, South Africa has more emerging to do than most.”
Indicator: SA will reign in public expenditure to avoid tumbling over the fiscal cliff
New Deal: “We must not fall into an unsustainable debt trap, where ever-rising debt payments cripple the country’s fiscus.”
Prospectus update:
- The unauthorized announcement of Jacob Zuma of free tertiary education (counter to the task group recommendations and without a Cabinet decision) was not a government decision. Instead of treating that as an unauthorized ad hoc decision by a tarnished leader, Ramaphosa accepted the massive unplanned increase in tertiary expenditure, well knowing the stress on existing governmental commitments during a time of diminishing tax inflow.
- In its March 2018 statement, when maintaining investment grading for SA, Moody’s fired a shot across the bow, warning about significant uncertainties with risks “tilted to the upside”. In the immediate future, it envisaged the promised cut in the number of state departments (and Cabinet) and the VAT increase would finance the increased spending on education. To keep government debt below 55% of GDP, it said the Ramaphosa government faced hard political choices with spending pressures from public service salaries and “the very fragile state of SOEs“, in particular Eskom.
- The opportunity to stand firm against higher than inflation salary demands from the public service unions was squandered: appeasement won the day rather than a stand like those by Ruud Lubbers in the Netherlands and Ian Khama in Botswana.
- After their country visit in June, the IMF warned that public sector wage increases present a prominent risk: government debt will continue to rise in the “medium term”, adding pressure by requiring more loans to finance the shortfall…
EOSA’s assessment: This kind of approach will be as effective in reigning in public sector expenditure as president Zuma’s repeated commitments to make war on corruption were in preventing State Capture.
Indicator: Sorting out State-owned Enterprises
The New Deal: “South Africa cannot afford wasteful, ineffectual or corrupt SOEs that are a burden on the fiscus… SOEs should facilitate expansion of the nation’s economic capacity.”
Prospectus update:
- A turnaround to place State-owned enterprises at the core of economic transformation and to restore good governance and viability was promised. In key SOEs like Eskom a new board of directors was appointed in January.
- The bailing out of SOEs continues: Eskom has just reported a group loss of R2.3 billion with its power utility’s contribution being a loss of R4.6 billion.
- Eskom’s auditors SizweNtsalubaGobodo expressed doubt about the power utility’s ability to continue as a going concern with current liabilities exceeding current assets by R20.6 billion. Total debt has increased by almost 60% over 4 years to about R600 billion..
- Despite this, the Chinese development bank just prior to the Brics-summit agreed to lend R40 billion to Eskom: against a state guarantee by the South African government. The terms and conditions of the “made in China loans” (also to Transnet) are still uncertain, but the question is whether the Boards of Directors had insight into the full extent and implications of these loans? (More on how Government responds to Eskom’s predicament in the section on strategic and managerial management below)
- Eskom acknowledged that while it has too many employees, during the 2018 financial year they expanded that number by 961 employees, to a total of 48 628.
- Through derailments on the Sishen-Saldanha line, Transnet has effectively cut Kumba’s turnover by R2 billion’s worth of iron ore, that could not be exported…
- SAA is effectively bankrupt and the question raised by Pravin Gordhan way back in his first budget in 2016 after replacing the best qualified-one-weekend-minister of finance remains unanswered: Why does government need SAA, SA Express & Mango? Emirates has just confirmed that it has no interest in investing in SAA.
EOSA’s assessment: Eskom, SAA, Transnet, Portnet all fail the acid test. The attempts to prop up what the auditors consider as unviable concerns whilst burdening the tax payers with the-higher-the-risk-the-higher-the-interest-kind of bail-out loans. Rather than facilitating growth, the SOEs (and Governments handling of them) have become a massive handicap.
Indicator: Restoring strategic and operational management systems to minimise ad hoc decisions
Prospectus update:
- The massive Cabinet with overlapping state departments has been kept and not scaled down, even by retaining several with notorious ministerial accountability records. If not streamlined before calendar year-end, the budget for 2019/20 will be based on the existing departmental and ministerial basis. Progress to the objective of a more streamlined and effective cabinet will therefore be slow.
- Far quicker decisions were arrived at on the following:
– When EWC became a focal point of KZN discontent there was an eye-wink somersault knee-fall before Zulu-king Zwelithini (considering the position of the Motlanthe Report). This feat of political gymnastics effectively revealed EWC in the current context to be racially reserved for land “not owned” by traditional leaders.
– When the Eskom Board and management stood on a zero adjustment of salaries, Minister of Public Enterprises Pravin Gordhan overruled them. This political overruling of a stance that was aimed at limiting the burden on the fiscus will not go unnoticed by Moody’s. It may just convince them that government is willing to appease in order to win the 2019 elections, and that appeasements weighs heavier than rebuilding the economy.
– During his July visit to Saudi Arabia Ramaphosa signed a deal on a large concentrated solar plant and also a factory to manufacture solar panels. Rapport stated Eskom did not know about these deals. Eskom has repeatedly complained that the energy it has to buy from small alternative energy producers was so costly that it would aggravate Eskom’s dire financial position.
EOSA’s assessment: One of the fundamental lessons of management is to minimize ad hoc-decisions. In the current context there was radical transformation, turning ad hoc-decisions into add havoc-decisions. In addition, it muddles corporate governance practice in SOEs: almost a repeat of the chaos under Lynne Brown as well as when Ramaphosa was in charge of the War Room at Eskom, taking on responsibilities without legal and fiduciary accountabilities. That resulted in Brian Molefe being transferred from Transnet to Eskom with then also a new Board of Directors (one experiences a déjà vu feeling). Such direct state interferences in internal SOE managerial matters stand (from a management perspective) on exactly the same footing as P W Botha’s infamous interference in a live SABC TV broadcast with Frank Robinson as the newsreader. The issue then: Did Alan Hendrickse resign from Botha’s Cabinet or was he dismissed?
The Boards of SOEs that should legally exercise oversight and strategic guidance are undermined by such direct political interference. It undermines the independence and accountability of the boards, since their eyes are thereby directed on the approving nods from the politicians.
End conclusion: Investment talk is cheap. The proof of the investment and growth pudding lies in the opening of production plants, the employment of workers and the export of goods and services… To assess whether this venture will have more chance than Steinhoff if the latter would now commence with a book-making attempt, keep your eyes on the following:
- South Africa’s ranking on the WEF’s Competitiveness Report (due end September).
- SA’s position on the Fraser Institute’s Economic Freedom Index
- Improvement or not on crimes against business.
- Statements (and especially off-the cuff utterances about the expropriation of property).
- The urgency and extent of investigations about corruption and maladministration not only concerning the Zupta-supporters, but also those on the Ramaphosa slate, e.g. Mike Mabuyakhulu (Cyril’s man just elected as deputy chair of the ANC in KZN and out on bail of R50 000 for charges relating to money laundering and corruption of R28 million) and Qedani Mahlangu (Gauteng MEC for Health when the Life Esidimeni abomination occurred that cost the lives of at least 140 people and the taxpayers billions of rand in compensation for gross negligence).
EOSA 