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South Africa

Business Maverick Analysis: The SA economy is in a terrible jam – this is how to fix it

When Finance Minister Tito Mboweni delivers his Budget in 2020, he will very likely have to do something depressingly familiar; he will have to announce that for the 10th year in succession, the Treasury overestimated SA annual growth for the year. It’s frankly one of those extended calamities you don’t notice because it goes on so long. SA has to break out of this depressing cycle and fast, which will require some rough compromises. But what? Here’s one idea. It may not be the best. It may not work. But it may provide an example of the type of action needed.

If you are in the unfortunate position of running a loss-making company, let’s call it Doom Incorporated, what do you do? Well .. it goes without saying, it’s hard. The first thing you don’t do is listen to the noise of the doom-mongers [but you might need to listen to shareholders], for the simple reason that it doesn’t help.

And there is an extraordinary amount of doom-mongering about the state of the SA economy, and rightly so, at the moment. South Africans have endured an amazingly long period of lacklustre growth, high levels of corruption, rank stupidity, and a frustrating lack of action. They are right to be angry and depressed [they are the shareholders, after all]. It’s only natural.

But, for the managers of Doom Incorporated, pointing out the obvious is a distraction, not a help. As the CEO of Doom Incorporated, you would know better than anyone else the parlous state of affairs in all its gory detail. The point is to take action, because, in the inimitable words of Albert Einstein, repeating the same action and expecting a different result is the definition of madness.

But what action?

Of course, your options are limited, and not one is pleasant. Your first job is to decide whether Doom Incorporated has a future. If not, the responsible action you would take is to close the company down. Alternatively, you could sell off some assets (SOEs).

The managers of SA Incorporated are lucky in this respect; this is not an option for them.

So there is a kind of quasi closing down the action you could take, and that is to request an IMF bailout. In a sense. This would be roughly equivalent to putting Doom Incorporated into business rescue. Essentially, you hand off management to your debtors, and they make you take the tough decisions you ought to have made on your own but couldn’t muster the will. It’s horrible. Just ask anyone from Greece.

What are your other options?

If you assume Doom Incorporated has a future, the next logical question is what kind of future? There are essentially only two choices: a more modest future doing the same thing, or a better future doing something different. In my experience, outside managers – and this includes the IMF – are essentially asset strippers and cut-downers. They are instinctively inclined to choose the first option, which is one of the reasons why IMF bailouts so seldom work and why the organisation is so hated. Their modus operandi is to keep the business, generally speaking, doing the same thing that it was because they are not innovators in any sense. They try to make expenditure fit the available revenue. That means selling the assets you can, cutting back, and reducing costs. Which means fewer staff, who are paid less, required to do more, and are all miserable. Money is on drip-feed. Refer to Greece above.

The problem with this strategy is that it often results in a downward spiral of [more] depression and gloom. In an effort to make the income meet the revenue, you inevitably put your revenue at risk too. But sometimes it does work. If it is possible to reduce costs while not affecting revenue, you are in the position of a doctor dealing with a cancer patient. Excising the cancer is brutal, but it saves the patient.

So that’s one option. The other option is to increase revenue. But this requires a whole new set of skills. It requires the ability to pivot; it requires flexibility and leadership; it requires knowledge of the market and industry expertise. It also requires, most of all, a written, time-specified, exacting, plan.

If you talk to people who have been through this process, one quality shines through: focus. Turnaround specialists tend to be, in my experience, extremely exacting people. That doesn’t mean they lack creativity, but they think clearly and are extremely demanding. But gradually they gain the confidence of staff by demonstrating that there is a firm hand on the tiller.

In SA, the best example to my knowledge of such a person was former finance minister Derek Keys. Keys was all of these things and more. He was the person who impressed on the new ANC government the parlous legacy they had inherited from a morally and financially bankrupt regime that preceded them. He carried around a file of what he called “grubby little pictures”, illustrating what would happen if SA continued the same course. He found an avid supporter in the ever-stoic Nelson Mandela, the gutsy Labour minister of the time, Tito Mboweni, and his intellectual match, then Deputy President Thabo Mbeki.

If memory serves, Keys used to say: if you have an unsolvable problem, lean on it and keep leaning on it, and sooner than you think, you will discover it wasn’t unsolvable at all. And that’s what the new ANC government did; it refrained from spending heavily, got the debt under control, gradually expanded services as it reduced its debt repayments. And it won the respect of the world.

After blowing R1.4-trillion and achieving nothing, that respect is now gone. There is a limited window before the outside administration comes in to demand austerity.

So the question for CEO of Doom Incorporated is this: what can be done in this limited period? One option for Doom Incorporated would be to try to get the debtors to back off a bit and trade your way out of the problem. Find the lines which are selling well, and sell more of that. It’s obvious.

In the SA Incorporated context, what would that be? My answer is simple; give the mining industry a huge boost. It is SA’s most promising product line, and now for all kinds of reasons would be a very good time to strap a turbo-rocket to its engine.

One of the first rules of business is to try to discover a unique selling point; something you can do that others can’t, or something you can make cheaper than others can. SA’s mining industry has declined inexorably over the past few decades, essentially as a consequence of stupid government regulations, inept and corrupt administrators, and ill-advised policy. But this is where SA Incorporated’s expertise is high. The product is exportable, it is currently in high demand (although how long that will go on for is an open question) and SA’s got lots of it. It is our more-or-less unique selling point.

So this would be my general plan, and trust me, the ANC will not like this.

  1. Give the mining industry a tax cut, on condition that any savings are devoted to building new mines.

  2. Suspend the raft of new regulations for a period of, say, 10 years, on condition that when the period is over, the transformation will accelerate.

  3. Drop the local beneficiation requirements. This is a cash-raising exercise, not an exercise in fake industrialisation. The priority is to restock the fiscus. Once that is done, we can frootle around with new industries.

  4. Drop the confusing regulations that try to make mining companies into local governments, and which then make it possible for local residents to claim some kind of dubious right to proceeds from the mine. Minerals in the ground belong to the people of the country, not some people more than others. Local governments should do their jobs, not outsource them to mining companies.

Limit the rights of administrators to fail to process applications, for example, by legislating that the answer is affirmative if there is no objection within a period of time. Department of Mineral Affairs administrators currently holds mining companies hostage particularly with, for example, bogus safety regulations, in order to force them to pay bogus “community organisations”. It’s a common scam that was partly revealed in the Optimum mine scandal. DM

In other news...

South Africa is in a very real battle. A political fight where terms such as truth and democracy can seem more of a suggestion as opposed to a necessity.

On one side of the battle are those openly willing to undermine the sovereignty of a democratic society, completely disregarding the weight and power of the oaths declared when they took office. If their mission was to decrease society’s trust in government - mission accomplished.

And on the other side are those who believe in the ethos of a country whose constitution was once declared the most progressive in the world. The hope that truth, justice and accountability in politics, business and society is not simply fairy tale dust sprinkled in great electoral speeches; but rather a cause that needs to be intentionally acted upon every day.

However, it would be an offensive oversight not to acknowledge that right there on the front lines, alongside whistleblowers and civil society, stand the journalists. Armed with only their determination to inform society and defend the truth, caught in the crossfire of shots fired from both sides.

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