Shareholders can rightfully ask why they’re being forced to pay the cost

This column was first published in Business Day 

It is somewhat easy to demand expedience over principle in the Old Mutual versus Peter Moyo saga. The boardroom battle knocked R10bn off the value of the company in the weeks after it sparked (though it has regained about half that). The dramatic public fallout could have been avoided if the company had negotiated a settlement with Moyo to walk away. He was paid R35.5m by Old Mutual in 2018, and even a multiple of that would be a smidgen relative to the costs of the dispute in lost reputations, leadership paroxysms and share prices.

That logic has supported many golden handshakes across the private and public sector. SA’s labour regulations, particularly the Labour Relations Act’s (LRA’s) unfair dismissal terms, apply equally to workers and capitalists. It is different elsewhere — in the US, for example, if you earn more than $100,000 a year or your job is to supervise people, the Fair Labor Standards Act doesn’t cover you. Rightly, legal protections focus on vulnerable workers, not those earning millions.

In the Moyo case, however, it is not the LRA that is at issue. The battles so far have been about the way Moyo was dismissed in terms of his contract with the company, and whether he was entitled to a hearing first. It is interesting that he has chosen to fight on contractual grounds rather than unfair dismissal.

At the centre is a mess of conflicts of interests. The allegation against Moyo is that he paid himself R31m in ordinary dividends from NMT Capital, a company he co-owns, despite the fact that Old Mutual’s preference share dividend had not been paid. Old Mutual owns a 20% interest in NMT and has extended finance to it via preference shares. Moyo has denied this allegation, saying Old Mutual had previously agreed to a different payment schedule on the preference shares. But this has not been tested in court.

The consequence of the first judgment against the company is that it must reverse its termination of Moyo. Old Mutual could have then held a hearing and again terminated him. Instead of doing that, however, the company issued a new notice of termination on different grounds while appealing the judgment. The second termination is on the grounds that the relationship between Moyo and the company is untenable, because of the way the initial dispute had been handled.

Moyo accused the company of contempt of court for the second termination and refusal to let him access the building after the first judgment, and has applied for a court order to that effect. He is also pursuing damages from Old Mutual for breach of contract. He has used the media to maximise the negative publicity, including dramatic footage of him being barred from entering the building. He has focused on chair Trevor Manuel, airing several claims against Manuel of conflicts of interest regarding the company paying his legal fees in certain disputes and his role as deputy chair of financial advisers Rothschild (which did work for Old Mutual). These allegations seem calculated to maximise Manuel’s (and the rest of the board’s) discomfort with the public glare brought on by the battle. Manuel let that discomfort slip when he publicly derided the judge who found against the company in the first hearing, later apologising.

The subtext to all this seems to be a payout. Moyo wants one and Old Mutual doesn’t want to give it. The Old Mutual board appears hell-bent on not paying out.

The habit of writing cheques to high-powered executives to avoid a fight is a problem. There are many examples. When KPMG fired officials in the midst of the Gupta scandal, it handed them (undisclosed) packages to go. When MTN parted ways with CEO Sifiso Dabengwa in 2015, he took a R23m package with him. Altron CEO Craig Venter was handed R15m when he left in 2015. The public sector has plenty of examples too. Brian Molefe is perhaps most notorious for his R30m pension payment that Eskom then recovered through the courts. SAA paid R9.3m to former CEO Khaya Ngqula in 2009. In the same year, the SABC paid former CEO Dali Mpofu R11m to leave.

Old Mutual could do us all a favour by interrupting this pattern, but that public benefit comes at Old Mutual’s cost. The company’s principled stance is costing it dearly, while the somewhat nebulous benefit, in the form of giving other executives pause before launching tirades against their companies, will benefit everyone else.

It takes a rather pigheaded commitment to principle to tide it out, and shareholders can rightfully ask why they’re being forced to pay the cost. Manuel and the rest of the board have a task ahead to convince shareholders to stay the course.

  • Theobald is chairman of Intellidex.

PRESS RELEASE. 25 September 2019

In response to the minister of finance’s request for feedback on National Treasury’s paper, Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa, (often called the “Tito Paper”) Intellidex has drawn up a submission with our views on some of the topics addressed in the paper.

Intellidex is actively engaged in advising investors on the macroeconomic environment in South Africa, as well as specific debt and corporate exposures they have. We also work closely with several banks on understanding their market places and so can see the domestic investment decision process clearly. We draw on these insights for our comments.

Overall, we welcome the paper and its focus on evidence-based policy making and promoting inclusive growth. In our engagement with international investors, this philosophical underpinning for the paper has been welcomed after what has been a long period of heavily ideological policy arguments with little evidence invoked to settle differences. We also appreciate the call for public debate and hope our contribution is useful. We look forward to further iterations of the paper.

South Africa is facing a deep economic lull in which policy uncertainty has been a major contributing factor. As a result, investment is being delayed or cancelled, even in those sectors of the economy that are benefiting from the weak rand and high commodity prices. It is essential that clear, growth-promoting policy is pursued as a matter of urgency and embraced by the government at large. On the present trajectory, unemployment will continue to increase, along with inequality, leading eventually to a fiscal (government balance sheet collapse) or social shock (violence). We think many of the ideas presented in the Treasury paper are appropriate and will contribute to growth, averting the disaster that is heading our way.

The paper, by way of tone more than explicit positioning, sets out a vision for the state as facilitator of economic activity, rather than the prime mover itself. This is a change from the developmental state ideas of the past, that we believe have demonstrably failed in the last 10 years.

We make some further suggestions that would enhance the policy ideas proposed. The paper is not clear on what South Africa is “selling” to the rest of the world, the opportunities we can present to global investors that will attract capital to invest in expanding the economy. This requires a vision of what the future economy will look like – one we believe will include expanded services and manufacturing. The causal chain from the current economy to this future economy needs to be set out, making clear the policy interventions that will facilitate it. The paper focuses on promoting competitiveness and labour-intensive growth, which is appropriate, but does not set out just what competitiveness and labour-intensive growth will give us.

It also notes the need for a capable state, with stronger monitoring and valuation of interventions. However, we think a capable state also requires institutional improvements, particularly how the presidency and department of performance monitoring and evaluation deploys policy direction from the centre.

Our input also focuses on the Treasury’s paper’s interventions to improve the competitiveness of network industries. We comment particularly on banking, but point out that greater competitiveness at a consumer level is positive for consumer welfare, but only marginal for economic growth. We think, however, that competitiveness at this end can be enhanced by introducing bank account number portability and interoperability of different money repositories such as e-wallets and traditional bank accounts. Account number portability would substantially lower the cost of switching accounts, leading to enhanced competition, but interoperability opens this further to include non-bank financial services, vastly widening consumer choice. However, from a growth perspective, it is far more important that bank funding can be drawn on to finance investment. This requires bankable projects, which in turn requires policy certainty and visibility on long-run cashflows from projects. Good procurement policy, as was exhibited in the Renewable Energy Independent Power Producers programme, is the way to crowd banks in to driving economic growth.

On Eskom, we point out that Treasury’s idea of selling coal-fired power stations will be very difficult, given the environmental and decommissioning risks associated with them. We also point out that the paper does not mention the public-private growth initiative (PPGI) which we think is a positive intervention to kick-start investment.

Our full submission can be downloaded here.

For further information, please contact us.

By: Dr Stuart Theobald, CFA

Prescribed assets are increasingly being looked to as a solution for both urgent and longer-term development funding needs. This is a mistake. Prescribed assets would be a cure far worse than the illness. It would distort capital markets, undermine market efficiency and discipline, harm investor confidence and reduce foreign investment. This downside far outweighs the potential benefit of increased funding for government priorities, an upside that can be far better met through other means.

In this paper we look at some of the background history on prescribed assets and the consequences of their use.

Prescribed assets are an unusual phenomenon. South Africa is one of few countries to have imposed a prescribed assets regime on the institutional savings market, which it did during Apartheid when insurance companies and pension funds were compelled to invest in municipal and other government debt. This reflects both the comparative level of development of the institutional savings market and the level of fiscal desperation that the government has occasionally found itself in. It is unusual to find a combination of these elements in one country.

Somewhat more common are prescriptions on public sector pension funds which look after the savings of civil servants, usually with a government guarantee on benefits. With a guarantee in place, the investment performance of the assets is less crucial for beneficiaries. Examples include national provident funds in Singapore and Malaysia that were required to invest most of their funds in non-marketable government bonds and the ATP public pension fund in Sweden that was required to invest in government bonds as well as mortgage credit institution bonds at interest rates that were significantly lower than market rates. This was true in South Africa during the prescribed assets era when the Public Investment Commissioners (the forerunner of today’s Public Investment Corporation) were required to hold 75% of their portfolio in government bonds. Yet these examples show the use of public sector savings. There are no examples we could find, outside of war time, of private sector savings being directed into government bonds.

The ANC’s election manifesto for the May 2019 election included only one sentence on the issue: “Investigate the introduction of prescribed assets on financial institutions’ funds to unlock resources for investments in social and economic development.” This followed an only slightly less terse statement from the 2017 Nasrec elective conference: “Government should introduce measures to ensure adequate financial resources are directed to developmental purposes. A new prescribed asset requirement should be investigated to ensure that a portion of all financial institutions funds be invested in public infrastructure, skills development and job-creation.”

This statement was in a resolution on investment and allocation of resources, which also included a reference to a Sovereign Wealth Fund that “should be set up to ensure that the free-carry shares in mining and other resource sectors be retained by the state, acting as the custodian of the people as a whole.” The issue of compulsory free carry in mining has not been referenced in the election manifesto but is a serious issue for businesses in that sector. The issue of prescription can therefore be seen as part of a broader intervention in the allocation of capital in the economy and the inclusion of prescribed assets in the election manifesto was a first step.

Beyond the manifesto and Nasrec references, the issue of prescribed assets has been on the periphery of policy debates for some time. For instance, the New Growth Path envisages that compulsory participation in private pension funds should be “linked to increased investment in DFIs [development finance institutions] to finance employment-creating projects”. Of course, this wording does not imply prescribed investment as there are market-based incentives that could be used, but one can detect in the phrasing that compulsion is being considered.

The institutional savings industry is highly regulated the world over. The line between regulation that is strictly in the best interest of savers and that which is in the best interest of government or political factions is sometimes blurred. Prudential guidelines, which are well developed in South Africa, attempt to balance the profitability and safety of investments by specifying exposure limits to asset classes. In South Africa, these have clearly been created with the interests of the end-beneficiary in mind, rather than the recipients of investment flows, and largely captured by Regulation 28 of the Pension Funds Act. This, however, does not specify any minimum allocation to any asset type, but rather specifies maximums in order to avoid over-exposure to high risk assets. The current regulation 28 limits are:
– Equity 75%
– Listed Property 25%
– Offshore Assets 30%
– Alternatives (e.g. private equity, hedge funds) 10%

In the Apartheid incarnation, prescribed assets were legislated in 1958 via the Prescribed Assets Act. This directed pension funds and insurance companies to invest in government bonds that were used to fund semi-governmental institutions, such as universities, the South African Broadcasting Corporation, and developments in the homelands . They were repealed in 1989 following recommendations by the Jacobs Committee in 1988.

The period of prescribed assets provides important lessons on the effect that the mechanism has. During Apartheid the prescribed assets proved to be a serious stumbling block to the development of financial markets in South Africa. It distorted the fixed income market, disrupting normal price signals. One of the most important functions of the bond market is to set the yield curve, an important price discovery mechanism that aggregates views about the future trajectory of interest rates. The yield curve enables government, businesses and consumers to plan around likely future borrowing costs, rather than the spot interest rate that prevails in any one moment. South Africa has a well-developed yield curve with price visibility out to 2050. Prescribed assets disrupt this by forcing investment flows into certain assets in the yield curve and therefore disturbing the pricing signals at those points. Without a well-functioning market that provides price discovery, the cost of all forms of debt increases as appropriate prices are less visible.

Apartheid-era prescribed assets also had a serious impact on returns. Pension funds were required to invest 53% of their assets and insurers 33% of their liabilities into public sector bonds. The return was much lower than that on listed equities and in the inflationary environment of the 1970s and 1980s, generated negative real returns.

Prescribed assets became effectively a stealth tax on wealth. The Jacobs Committee found that life insurance companies held on average 29% of their assets in prescribed assets in the 1970s and 1980s, and the negative real return translated into an effective tax on assets of 1% in the 1970s and 0.3% in the 1980s . State pension funds were pressured into funding even more prescribed assets than strictly required, resulting in serious unfunded liabilities by the end of Apartheid for funds such as Transnet’s.

The lesson of the previous prescribed asset regime are clear: it distorted and undermined the efficient functioning of the bond market and it damaged returns to institutional shareholders, creating unfunded liabilities to pension fund members.

In South Africa, the state capture era illustrated the importance of market discipline in interrupting the egregious diversion of investment into corruption that we saw at Eskom and elsewhere. The actions of the Development Bank of South Africa in refusing to role over Eskom debt in the face of a potential qualification of its financial accounts, was crucial in improving the financial management of Eskom. Similarly, public statements from the likes of asset manager Futuregrowth in refusing to fund state-owned enterprises unless governance was improved, were crucial to stanching financial mismanagement. Prescribed assets remove this form of market discipline.

To these a fourth and obvious consequence can be added: that it undermined the efficiency of capital allocation and therefore undermined economic growth. Investment is a key driver of economic growth and the efficiency with which investment is allocated directly effects the consequent impact on economic growth. When capital is directed at low-yielding government securities it is directed away from higher-yielding opportunities which by definition drive higher levels of economic returns. Capital markets should allocate capital, a scarce resource, to where it can most productively be used.

A counter argument to this point might be that prescribed state bonds can yield a higher public return rather than a private return. In other words, the impact on economic growth can be substantial but that these returns are public and not able to be directed to the providers of capital and therefore a usual market mechanism is not available. This may be true in the case of productive infrastructure, but it remains optimal to fund this through taxation rather than prescribed bonds. Any growth-enhancing investment increases GDP which then increases tax receipts. The public sector thereby obtains a return on investment enabling it to meet financing costs. This is obviously not true in all public good provision such as health and welfare, but the prescribed assets discussion so far has focused on infrastructure and related growth-enhancing investment.

Prescribed assets do nothing to add to the savings pool, but merely redirect savings from other investments. Indeed, by lowering the overall returns to savings through pension and insurance products, prescribed assets can actually lead to withdrawals from the savings pool as savers choose to redirect voluntary contributions into consumption or other private savings mechanisms, given the lower opportunity cost of doing so. In the New Growth Path the discussion of government investments is associated with compulsory pension savings. The use of compulsion appears to be a key part of government thinking on prescribed assets in order to avoid this problem.

Furthermore, prescribed assets and the damage to market efficiency also discourage foreign investors. Foreign capital flows have been critical to the funding of government since the democratic era. These have been attracted to the South African capital market by the institutional strength of the bond and equity markets. A smooth yield curve and commitment by government to respect market mechanisms to date has helped build foreign investor confidence. Prescribed assets and resultant distortions on
It might be argued that prescription does not necessarily distort the market because returns would anyway be market-related and investors would anyway invest in the relevant instruments. Indeed, when prescription was abolished in 1989 for some years after institutions were still required to invest 10% of assets into government bonds, however this proportion was below the “natural” investment level anyway so made no difference to investing behaviour. If this is the case, however, prescription serves no purpose.

For South Africa, the following negative consequences would result from prescribed assets:
• Less capital would be available for the private sector as some would be diverted to the public sector by prescription.
• Overall capital markets efficiency would decline, particularly in the bond market, with the yield curve being distorted and thereby increasing the transaction costs of all debt.
• Market discipline would be diminished and less able to influence the quality of financial management of the recipients of funding.
• A stealth wealth tax will be imposed on all pension savers to reflect the below-market returns on assets. For defined benefit schemes, this translates into a tax on companies. For defined contribution schemes, it is a tax on scheme members.
• Savers will have an incentive to avoid directing cash flows into pension savings or insurance products, which in the case of voluntary retirement annuities is likely to decrease overall savings.
• Foreign investor confidence in the efficiency of South African capital markets would be undermined, further reducing the available savings pool. Foreign capital availability has been key to funding government since democracy.

These are far in excess of any potential benefit from prescribed assets.

The government needs to stop faffing and implement change if we are to save ourselves

This column was first published in Business Day

There are two sorts of people who read my research or listen to my presentations.

The first can disagree profoundly with an argument or a forecast but still come back for more, understanding the way I work, wanting to engage and debate.

The other group, however, throws up walls. They will react negatively to any depressed outlook or scepticism. They are unable to engage when asked why they are being so negative and cannot see the difference between an unrealistic negative forecast and a realistic, constructive negative forecast. They will then retreat to (insert unpublishable colloquialism here) or a sales pitch. I don’t react particularly well to sales pitches.

Some people just don’t want to hear bad news and react instinctively against it. I was lucky recently when I had the opportunity to address a major firm’s annual general meeting. They took the depressing news pretty well, even though it made their lives a little more difficult. They recognised their clients appreciated the honesty and detail behind it.

This splitting of people is exceptionally important in the current context for business — and, indeed, right now — more so as many firms are starting their 2020 planning cycles and budgeting.

Both these types of behaviour have been exhibited in 2019. Before the elections, a majority of business were in the latter camp in public and couldn’t process a more nuanced outlook on the government (in private, there was less of a majority and this split is an interesting issue in itself).

After the election, the needle has swung in the opposite direction and people are willing to accept a realistic negative outlook, or at the very least engage rationally with it. This shift is why sentiment is ground down and speaks to the slow pace of recovery to come. Yet the alternative is not somehow possible if conjured by magic. Hence Ramaphoria collapsed so definitively soon after May.

Even those that maybe see some recovery or have a different line of reasoning on the current situation can still appreciate the strong and increasing reform pressure now being applied by business onto the government.

Those that throw up walls, however, are a danger to generating the necessary pressure for political foundations to shift the reform machine. They put up a range of arguments that simply don’t cut it. The standard line is “it will all be fine in the end”. This ignores two things.

First, even if “bad reforms” don’t happen in the end (say, expropriation without compensation or national health insurance in its most extreme form), the damage you can create in the interim (what we call fallout risk) can be so severe as to prevent a recovery.

Second, things will only be “all fine in the end” if people (fund managers, business people) actually stand up and do something about it. There is not some mysterious other force that can substitute. This is true in the context of SA’s obsession with social compacting. Within this political economy context, business has to wholeheartedly stand up for what it wants and cannot pre-compromise. It is exactly a fudged mindset on this that means the ANC believes business will always “roll over”.

IRP (integrated resource planning) is the latest example of the absurdity of social compacting through Nedlac. The behaviour of labour in objecting and holding up an entire process that was never a legal requirement in the first place, without a constructive alternative that was costed and thought through, should be the final nail in the coffin. Nedlac should be abolished.

The question for business (and ultimately the president and ANC too) is what happens if it is the case that ultimately balance is impossible and the time wasted leads to worse outcomes? Maybe there are some things (such as Eskom or indeed lowering the cost of doing business) that simply cannot be compacted. Coming to this view would profoundly affect how you deal with compacting in the short run.

I apply this to Eskom in two ways. First, there simply isn’t time to be faffing, and something needs to be done right now (by the mid-term budget speech). But second, jobs and investment maximising outcomes do exist through a Just Energy Transition, and so leadership should be applied to tell labour to back off as the real interests of their members are being accounted for in policy. This is how to cut through compacting.

Business thinking about the year ahead should be cognisant that a dead end on compacting may not be avoided. Loose monetary policy globally, comfortable SA elites, “normalised” inequality, poor equity market returns driving money into government bond auctions, weak growth keeping the Eskom system just on the right side of load-shedding — all this places the presidency in far too comfortable (and patient) a place.

This is not to say some people in power don’t “get it”. I think there is a subset of ministers who actually do understand that the country is fundamentally in the wrong place. The problem is the system itself hasn’t flipped, given the lack of political capital deployment to take the tough decisions.

One person who does get it is justice and correctional services minister Ronald Lamola. Speaking at a Kgalema Motlanthe Foundation lecture this past week, he stated very plainly that there was no time to spare and that government just needed “to act … what is implementable must be implemented”.

Exactly. Jump.

• Peter Attard Montalto is head of Capital Markets Research at Intellidex.

Even though government now realises how poorly positioned the economy is, it remains hamstrung in trying to turn things around, says Intellidex’s Peter Attard Montalto. Featured in Business Tech

This column was first published in Business Day

The multi-decade low business confidence reading last week, which came out at 21 out of 100 (50 indicates a neutral outlook for the RMB/BER index) was shocking.

It is the lowest since the 1998 emerging markets crisis, when interest rates hit 25.5%. It was worse than the global financial crisis in 2009 when the economy shrank for three quarters.

Next we will be hearing again about an “investment strike” — a term frequently used by some to accuse business of trying to sabotage the economy (most recently SA Communist Party general secretary Blade Nzimande in a speech in August).

The sense of “strike” seems to be in a Star Wars rather than labour sense, an attack rather than a withdrawal, even though the latter is what actually happens. With businesses this pessimistic about the future of the country, they are not going to be taking scarce capital and putting it at risk to expand operations. There is no intention to undermine the economy — it is a reaction, a return to the barracks, a view that the risks of an advance are too great.

President Cyril Ramaphosa has made much of an investment drive to attract investors. He has appointed eminent emissaries to engage with the world and held big conferences, with one last October raising R290bn in pledges. But the real problem is domestic investment at the macro level, by which I mean the environment has to be fostered for millions of decisionmakers to choose expansive, growth-inducing investment rather than risk defensiveness.

The decision to put money into local bricks and mortar requires higher credence in the economy being able to deliver a return. One cannot use the strategy deployed so far — of getting business leaders together and obtaining promises to invest and then phoning and harassing them about whether they have done it. A macro strategy permits no promises or phone calls. It requires inducing investment decisions solely because millions of people believe it is in their own best interest to invest. That it will deliver higher returns than the alternatives.

It needs to be the fixed kind that goes into building factories and buying machines to enable potential output to grow rather than the portfolio kind that goes into JSE-listed companies. Portfolio investment can rely on corporate management to shift exposures to foreign higher-growth markets or to sell commodities that earn hard currency, so listed companies can do just fine while the domestic economy withers. On its own, it does little to increase economic capacity.

Of course, I should hasten to point out that the figures don’t reveal this absence of investment yet. Private-sector investment spending has actually been higher than government’s and state-owned enterprises’ for a few years (which was always the irony whenever someone delivered the “investment strike” accusation at business). But it has dipped the past two quarters.

Corporate credit also provides an indication — the rate of growth of lending to companies has been drifting downward since 2015. But that business confidence figure is a leading indicator. You can be sure the actual investment numbers will start to reflect negative decisions soon.

Investment decisions are about two things: projected returns and risk. The government has a lot to do with both, though it is the latter that is easier. The government has within its power the ability to offer regulatory certainty. And, despite promises, regulatory certainty has been scarce.

The mining charter, digital migration, visa rules, Eskom resolution, energy policy and so on are still dragging on after promises they will be dealt with swiftly. Instead, the big policy moves that have been made have been negative.

National Health Insurance (NHI), for instance, offers a Brexitesque level of uncertainty set to drag on for years as attempts are made to ram into existence a fiscally impossible policy. The Credit Amendment Act signed into law by the president two weeks ago risks creating permanent uncertainty about the security of lending at the lower end of the market. It is hard to point to one single actually delivered policy that is good for business.

Projected returns can be helped by improving the environment in which businesses operate. Filling in a form is a cost. Filling in many, for everything from getting a BEE certificate (relatively easy) to workman’s compensation registrations (oh boy), adds up to a lot. That burden affects small business most because it is largely a fixed cost which big business can average out. While we pay lip service about stimulating small business, slashing red tape is a simple way to promote the chances of small business success relative to large businesses.

None of this will be news to the presidency. There are good ideas and policies being developed there. The National Treasury’s economic policy paper is another set of good ideas that makes the same points about red tape and policy certainty. Our problem is the implementation. So far there are no implemented and reliable policies that business decisionmakers can see that will shift their return/risk expectations positively.

The president has had a good week in response to xenophobic violence and violence against women, speaking out and publicly. He has shown some leadership (though there have been demands for more on that front).

Now we need some of that spirit directed at interventions that will help businesses to renew their faith in the future.

  • Theobald is chairman of Intellidex.

The mandate of the PIC Commission is not just to make sense of what’s been going on but also to craft a vision of how the PIC should be run in future, says Intellidex’s chairperson Stuart Theobald. Listen to the full discussion on Classic FM:

Treasury’s proposal to sell Eskom’s coal power stations is more of a political baseball bat to end the torpor in government because there would be no buyers, says Intellidex’s Peter Attard Montalto. Featured in Financial Times

PR seems to be getting worse not better and this is reinforcing an excess patience on reforms

This column was first published in Business Day

I like nothing more than discussing grand ideas with people with their hands on the levers of power. At heart I love systems and understand what makes them tick and how they become broken and can be fixed. (While typing this I sit here in Cape Town after the World Economic Forum with a broken laptop hinge and some epoxy resin trying to glue it back together.)

Political economy systems work on very simple interconnecting drivers, like lines of code. The problem in SA is that one of these lines of code says “IF IN DOUBT WAIT”.

Politicians are far too patient. Risk aversion combined with underlying patience is a toxic mix. As I have often said before, we need a bit of panic and hands in the air, which fundamentally is the opposite of patience.

‘Lines to take’ documents are often pilloried but are how well-functioning political systems work

Clever politicians can balance a risk aversion to undertake action (or reform) with effective public relations (PR). This is the art of the politician that they are meant to be so effective at.

However, the past weeks have shown the fundamental inability of this administration to do PR effectively on the issues of sexual violence and xenophobic violence. A well-functioning reform system is unlikely if the state doesn’t have a handle on PR.

Maybe that is unfair, but with sentiment at rock bottom and business unwilling to give the benefit of the doubt upfront, these kind of parallels are likely to occur.

A well-functioning Union Buildings on either PR or reform would be able to push down directives, deploy political capital and demand accountability with information flowing back upwards.

When there is a crisis of violence there should be the obvious deployment of control from above on communications, standard responses and wordings agreed to use and avoid. This should be drummed into public servants and politicians in the media. “Lines to take” documents are often pilloried but are how well-functioning political systems work.

One would have thought this would be the case in a country where rape, femicide and xenophobic violence are depressingly and outrageously common. But no.

Negative effect

I think the government underestimates the negative effect this has on investors and business. This was brought home to me in the past week when two separate foreign investors saw problematic PR in the mainstream foreign media. In the case of the sexual violence it was the Government Communication Information System tweet that effectively blamed women. And then there was the media conference video of the deputy minister of police, whose knee-jerk reaction was to question the concentration of foreigners in certain areas. Both had similar responses from investors: “what the hell?!”.

Business can show patience (and survival) through hibernation. This is what growth of 0.6% this year is ultimately all about. A private sector that is ticking over in a minimally sufficient form ready to do more but unable to with the set of current and expected business conditions.

Hence we can have a bubbling up of pent-up demand after load-shedding in quarter two with growth of 3.1% quarter on quarter, but then underlying growth weakness will show in quarter three as that falls back fast towards 1%. This shows the underlying robustness of the private sector to survive but then reveals deeper problems, such as the growth in quarter two being jobless, with the large jump in unemployment to 29%.

The government sometimes characterises business as happy in this hibernation mode, but I think this is totally untrue. Companies want to expand and generate more business. The private sector does not like the feeling that comes with misallocation of resources and capital.

Hence pressure is meaningfully increasing on this administration on a wider range of fronts. PR seems to be getting worse not better, and this is reinforcing excess patience on reforms. This is a completely unsustainable political situation as much as it is an economic crisis or anything else.

The system will break to something new. The question is what.

At the moment a general policy narrative is either “do nothing”, or “endlessly socially compact” or “just keep talking” — that is, a surfeit of patience.

In a new system there needs to be an understanding that leadership is about deploying compacts that are already balanced and having the ability to get buy-in without endless consultation and religious-level observance of Nedlac; targeted deployment of political capital and then an ability to manage both policy and PR through the system.

Such a system, however, needs to understand the fundamental flaw of the existing social compacting religion: that there is no first-mover catalyst. This is what the government has to do to deal with the necessary preconditionality that business (and social partners) have before they can come to the party. Such a first-mover problem is deeply entwined with the excess of patience.

For instance, how can business agree to come to the fourth industrial revolution party without the necessary skills, which requires visas as a precondition. This is the root problem of Thuma Mina social compacting: it is a large single step forwards that “society” takes in one go. Instead, the reality is a set of key interdependencies that require sequencing and that someone goes first.

In an environment of a trust deficit and zero benefit of the doubt, for the government to play its role will require leadership and an ability to manage the state — getting the building block of PR right first.

• Attard Montalto is head of capital markets research at Intellidex.

Negative sentiment is quite rational because of the lack of change in SA, says Peter Attard Montalto, Intellidex’s head of capital markets research. Listen to the full interview with Bruce Whitfield on Radio 702

Intellidex would like to appoint a senior part-time bookkeeper to work one day per week.

The ideal candidate would:

1. Have considerable experience in bookkeeping at a multinational company working in multiple currencies, preferably with experience of SA, USA and UK companies including differing tax requirements.

2. Be experienced in Sage and Quickbooks online.

3. Be willing to work for one day per week (which could be split into two half days) based at our offices in Sandton

Duties will be to support our fulltime accounts manager to ensure appropriate intercompany accounts are maintained and that the statutory accountants in each jurisdiction are fully supported in tax filings and creation of annual financial statements.

The role would suit a retiree or someone with a portfolio of bookkeeping responsibilities.

The role would be based at our offices in Sandton.

If you are interested in the position, please send a covering letter in which you address the three requirements listed above and CV with references to or complete the form below. Deadline for applications is 20 September 2019.

Please note that failure to load the correct documents will result in your application not being processed

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The PIC can commit to social and corporate governance and social impact investing by bailing out state entities – but only if the sacrifice of financial returns can be justified in terms of the public benefit, Intellidex argues. Featured in Daily Maverick

We are recruiting a manager for our philanthropy research and consulting practice to fill a position that has become vacant.

Over the last few years, Intellidex has developed a thriving research capability in analysing foundations and other institutions in the non-profit sector. Our evidence-based approach enables us to advise foundations on overall strategy. In addition, along with our investment research team, our philanthropy practice supports research and consulting on impact investing including investment strategies and analysis of impact investment opportunities.

The ideal candidate should have:

  1. A graduate degree in a social science field with some bearing on the non-profit sector. A master’s degree or above is preferred.
  2. Experience at a senior level either in a foundation or similar non-profit, or in a service provider to the non-profit sector.
  3. Experience engaging directly with clients and evidence of ability to manage productive and mutually beneficial relationships
  4. Examples of written research reports based on original primary research such as surveys or interviews of respondents.
  5. Experience in managing complex research projects and overseeing teams working on them.
  6. Highly organised and experienced in Microsoft Office software.

The role will involve supervising original primary research on non-profits and ESG investing, working with our primary market research team and other experts at Intellidex. It involves analysing information collected and writing reports providing detailed insight into the data. Occasionally it requires presentations of report results to clients and the public at large.

Intellidex offers a unique environment that draws together top academic skills, financial markets research and insight on South Africa’s policy development. Our philanthropy practice aims to maximise the impact of the non-profit sector, just as other parts of our business work with financial institutions and policy-makers to improve outcomes for all South Africans. Intellidex is well recognised for high quality research and you will become a core part of a highly skilled team, providing significant learning opportunities to advance your career.

Performance will be judged by the delivery of high quality research projects and reports, as well as engagement with clients and other audiences. You will also share responsibility to attract business for the philanthropy practice. We have offices in Sandton, where this position will be based, London and Boston. The position will report to the global head of strategy research.

We offer a small company environment in which you will have considerable latitude to shape your role. Remuneration will be a mixture of basic and performance-based pay.

Our standards are high. You will be working with MBAs, CFA charterholders and PhDs on our team to ensure that Intellidex delivers high levels of client satisfaction and responds dynamically to new business opportunities.

If you are interested in the position, please submit a covering letter in which you address the six requirements listed above and CV using the form below. Deadline for applications is 20 September 2019.

Please note that failure to load the correct documents will result in your application not being processed

Stay in touch with Intellidex.

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The PIC can use its influence to improve governance and sustainability at South African companies, which would have spillover public benefits for all, Intellidex argues in its report to the PIC Inquiry. Featured in Fin24

PRESS RELEASE 3 September 2019

Intellidex has drawn up a report on the future of the Public Investment Corporation to assist the PIC Inquiry in its deliberations on the public sector fund manager.

In it, we argue that the PIC must serve both the interests of the members of pension funds that it manages as well as the public at large. We argue that these objectives are in tension: pension fund members are best served by maximising financial returns within an appropriate risk framework, but the public is best served by prioritising public interest at the expense of financial returns if necessary.

The public’s right to be considered by the PIC in its investment strategy is earned because the public underwrites the risk of the government employees’ pension fund and incurs a cost in funding pension fund liabilities up front. The Government Employees’ Pension Fund (GEPF) is a defined benefit scheme, therefore members are not exposed to the investment performance of the fund. From a national point of view, obligations to civil servant pensioners are one of the government’s liabilities, among many. This liability is treated differently, however, by setting aside savings for it up front. This need not be the case: other public sector pensions around the world (and indeed, South Africa’s old age grant) are paid out of current revenues. The special treatment of pension fund liabilities is appropriate because it provides for financial discipline in that benefits have to be costed up front, and provides a notional benefit to pension fund members in limiting bankruptcy risk. However, in covering this liability, the public incurs a cost in not funding more urgent priorities and in accepting investment market risk.

In return for these costs, the PIC’s investment mandate should include social impact objectives to compensate the public. Such objectives may include black economic empowerment, climate change mitigation, job creation, industrial development, infrastructure and so on, the achievement of which would deliver public benefits that are not captured in the financial returns to the fund.

This point, however, does not mean that anything other than world class investment decision making and investment monitoring should take place at the PIC. There are several examples of public sector funds around the world that apply excellent practices that the PIC can emulate. In this regard we call for:

Full details are provided in our report, which can be downloaded here.

This column was first published in Business Day

SA has a “bootleggers and Baptists” problem. The term was coined by American regulatory economist Bruce Yandle. He observed that American evangelical Christians and illegal alcohol sellers often aligned in lobbying to ban alcohol sales on Sundays.

Where they succeeded, the bootleggers got much more profitable Sunday sales and the Baptists got their notion of Sunday rest. But bad public policy results: alcohol consumption could be better reduced through a Sunday surcharge, which could be directed to public benefits rather than bootleggers’ profits.

SA policy debates are riddled with bootleggers and Baptists problems. Vested interests in the spoils of state capture align with ideologues to block change. The state captors fan certain ideological narratives that will prevent the implementation of changes that would lead to longer-term public prosperity (but not other ideological shibboleths that would frustrate state captors).

SA’s bootleggers and Baptists are rallying. Last week’s surprise policy paper from the Treasury is a sensible setting out of the obvious policy moves that would unlock economic growth. But the response of vested interests has been sharp and aggressive.

Countries that make economic breakthroughs do a lot of planning. SA kind of knows this, as we demonstrated in the National Development Plan. But we are unwilling to suffer any discomfort now in the interest of longer-term prosperity.

So, while we all know that the electricity sector has to be reformed for the country to have any hope of long-term economic success, the distress caused to coal miners, coal transporters as well as tens of thousands of unnecessary Eskom employees, stands as a sharp barrier to implementing the plans that would leave us all much better off in the future. The same is true of digital migration — the short-term pain of getting everyone to change the way they receive television signals looms larger than the long-term gains of redeploying the spectrum.

To try to trade off short-term pain against long-term gain, we have developed the concept of “just transition”. In theory, we should be able to overcome short-term resistance by promising to direct the spoils of longer-term prosperity towards those that will suffer now.

So, for example, we can find ways to re-employ coal miners in renewable energy plants, but this is difficult to do when the status quo is unjust. For example, the failure of Eskom’s supply chains has spawned (and partly been driven by) a huge and highly profitable coal-transport industry.

It cannot continue under any scenario for Eskom’s future, but having become a powerful vested interest, it can demand economic rents to drop its resistance to change. Such vested interests are endemic in the post-state capture state and make notions of a just transition difficult. We should be ending such rent seeking, not laundering it into a share of the legitimate fruits of successful economic planning.

China, the world’s outstanding economic planner, arguably rides roughshod over resistance. In its efforts to cut pollution it has shut down swathes of steel plants and coal mines across the country, shedding 1.8-million jobs. While the country has simultaneously built a renewable energy industry employing millions more, the transition of the people from one to the other is not done.

China’s approach is utilitarian, promoting the interests of the greatest number, rather than protecting the interests of single groups who might unjustly suffer. But these are not mutually exclusive. China as well as SA can protect the losers in their development processes.

The Treasury paper says all the right things: improve competitiveness, cut red tape, promote labour-intensive growth, promote small enterprises, improve transport linkages and much else. But vested interests will opportunistically align themselves with those ideologically resistant to the Treasury’s underlying economic orthodoxy.

The paper serves a useful function in forcing to the foreground those opposed to sensible policy. When it comes up for debate in the cabinet meeting on Wednesday, it will be interesting to see who comes out against it. There will be Baptists and bootleggers.

Two things are needed to break through the resistance: leadership and a just transition. A just transition that accommodates legitimate interests who stand to suffer short-term pain, is one way to placate part of the resistance. But it has to be credible and only strong leadership can make it so. Short-term losers have to trust that the long-term benefit will actually materialise before they willingly lay down their defences now.

Strong leadership is essential for another reason: it must resist the bootleggers. Public policy cannot be used as a device for further rent extraction. The public is depending on the cabinet, with the president at the helm, to prioritise its interests over the bootleggers and the Baptists, suppressing the former and accommodating the latter.

Let us see this week if our leadership can deliver it.