By Stuart Theobald, PhD

A version of this column was published on Business Day

Will SA ever have the capable state it dreams of, or should we reconcile ourselves to a weak state in perpetuity? How should both public and private sectors behave if that is the lot we must live with?

The “lost years” of the Zuma presidency were far from inert. A weak, compliant, sycophantic civil service is exactly what Zuma and his conspirators desired and, with some notable exceptions, what they got. Droves of experienced public servants were either hounded out or gave in frustration.

What realistic chance is there of restoring it? The Mbeki-era government that delivered an economy growing over 5% between 2003 and 2008 was in retrospect a dream team. Key departments from minerals and energy to the national treasury were led by gifted women and men who managed to walk a tight line of transforming the economy while keeping it growing. The balancing act required coordination across government to deliver policy certainty that provided both carrot and stick to the private sector. This was helped by a tail wind of the commodity price cycle, but we were able to ride it thanks to somewhat clean and somewhat efficient government delivering an unambiguous policy agenda.

An Institute of Race Relations study in 2017 found 216 DGs were suspended, removed or shifted between 2009 and 2017 in 32 departments. As a result, President Cyril Ramaphosa has inherited a massive skills deficit from cabinet down. It took ages for him to find someone willing to take on the finance minister role and Tito Mboweni only promised to keep the seat warm temporarily (Mboweni seems since to have developed a taste and ambition for the role, and long may he continue). The department of public service and administration advertises over 300 senior civil service roles per week. Even with salaries 60% higher in real terms than that paid to Mbeki-era civil servants, these are a battle to fill. The same problem has dogged the state-owned enterprises which have struggled to fill management roles.

The consequences are clear in the challenges the presidency and cabinet face in getting departments to implement policy. The department of home affairs struggled to make straightforward changes to the tourism visa regime that Ramaphosa had asked for early in his presidency, particularly in dropping the birth certificate requirement for foreign children entering the country. It took until November 2019 for government to make it official despite announcements first being made in early 2018, and one still hears anecdotes of tourists battling at border posts with intransigent officials seemingly unaware of the rules. A new regime for skilled visas remains frustratingly dogged by delays despite promises from the president. I suspect the story would be quite different were the department led by someone of the calibre of former director general Mavuso Msimang who was hounded out during the Zuma years.

Similarly, promises of a new era of policy certainty in mining have not yet been delivered. Key issues like the mining charter and legislative amendments continue to be dogged by delays and stand offs with the industry. One craves someone like Phumzile Mlambo-Ngcuka who shepherded through the new order mining rights reforms of the Mbeki era while charming the industry into acceptance. And let’s not even mention the farce over energy policy.

These prominent examples are the tip of the iceberg of civil service disfunction. Consider that just 26% of provincial and national government entities and just 8% of municipalities received a clean audit according to the auditor general’s latest reports. Capacity is dire.

Ramaphosa has to somehow rebuild the civil service with a dysfunctional Luthuli House that half the time seems to be plotting his downfall. We must temper expectations of what is possible. The first three cabinets of the democratic era, and the civil service that was built by them, represented the best people that a strong ANC could draw on by deploying a vast amount of social capital. But the party is now weak and riven by factionalism. The “clever blacks” that Zuma ridiculed have little interest in putting their skills back into the government.

Ramaphosa must focus his limited talent pool on policy and implementation that delivers the biggest bang for the buck economically. Highly complex reform efforts that depend on an eminently capable state – the national health insurance scheme is an obvious example – should be put on the backburner. Policy should focus on setting the rules for the private sector and letting it bring skills to the table, rather than trying to deliver all and sundry itself. He is running a ship that cannot attract skilled sailors. It should be pointed at the calmest waters.

Intellidex’s head of capital markets research, Peter Attard Montalto, attended the UK-Africa Investment Summit in London on 20 January. He conveys his thoughts on some issues affecting South Africa.

There was a really great buzz at the summit and its side events, thanks in part to the fact it was packed with over 2,000 people coming together in one place, some barnstorming rhetoric from Boris Johnson and a collaborative atmosphere between capital deployers and capital users.

Clearly everyone understood the opportunities on the continent as a whole but also appreciated the depth of talent, capital and knowledge that is available in London regarding funding for the African continent.

South Africa, however, got somewhat lost in the mix.

The fact President Cyril Ramaphosa didn’t turn up and Finance Minister Tito Mboweni was somewhat underutilised meant that the government, despite a busy schedule, was somewhat left behind by other, more dynamic government delegations. These had more specific, well-crafted sales pitches and a firm offer – generally as part of regional hubs playing to specific domestic strengths and specialisations.

We saw in last year’s presidential investment conference in South Africa and in speeches from International Relations and Cooperation Minister Naledi Pandor that SA still lacks a crisp narrative apart from “things are getting better, we are big”. In fact, a speech that Pandor gave on Sunday night at an event I attended really failed to hit the market – but in a way that often crops up with the government. The idea somehow emerges that SA is a charity case and because it suffered apartheid and came out the other side, it is thought of as a good narrative for investment. This is crazy.

Investors look to the future and analyse risk-adjusted returns. Similarly, the idea was expressed that if investors are unwilling to invest in SA then the country would “go it alone”. Robust sentiments for sure but not a helpful pitch.

The government sorely needs to work on its offering and pitch.

Ramaphosa’s presence would not have made a huge amount of difference in London – or Davos – to be honest, though the rhetoric would have been crisper and tighter.

SAA and Eskom

SAA is seen as a sign of the status quo in both policy and more general thinking and attitude to the economy. This concerns investors, even if the issue itself has little direct bearing on foreign investors who avoid SAA wherever possible.

Eskom has some elements of this “revealed preference” around the functioning of the developmental state but energy security is actually the real issue. We are seeing the impact now of closing smelters coming through in company results but foreign manufacturers look at the operational problems, the lack of procurement of new generation capacity and political and ideological blockages to embedded and distributed generation. Then they just see that the cost benefit analysis gets thrown out of whack because of the need to install generators or other alternatives for their operations.

More generally, the electricity situation relegates SA to an unfortunate “any other African country” bucket in marketing terms – but more so given the lack of speedy progress on resolving it. Of course, this has a more direct impact of blocking off potential investments in renewable energy.

Reform and policy inertia

Fundamentally, reform is about moving the cost-benefit dial for investors and action is needed now for future effect.

There are so many things that could have been done; it is partly about tone and moving away from state-owned assets like SAA, recognising a crisis and a need for speed and talking to that in resolutions. The ANC should also put pressure on government, for instance, by setting timelines on reporting back.

More specifically, there could have been much more specificity on unblocking issues like embedded generation and distributed generation, specific references to REIPPP round 5 occurring, highlighting desired outcomes from the energy war room and dialling down references to clean coal.

More widely there should have been focus on the “Tito paper” itself and its implementation. Overall however, it is action that should be the focus.

The problems here that are deep-seated and are ones of public relations and spin obscuring reality, policy contestation in government and then blockages of ideology, inefficiency, ineptitude and lack of capacity all coming together in a toxic mix to prevent policy flowing into implementation action. This is compounded by a very late realisation and then minimal action by the Presidency to actual find ways of bypassing the dysfunctional state by using the private sector and trusting it to deliver – which in turn loops back to mindset and the status quo.

In relation to that, ANC secretary-general Ace Magashule’s statement that the recent NEC meeting in Irene was “the best NEC meeting they’ve had” is largely spin that analysts – and investors – are sceptical of. We poke more for our clients on the details of what actually occurred.

There were some small and subtle shifts occurring at this NEC that we have been talking to clients about (accepting restructuring at SAA for instance) but the reality is that much stayed the same.

This column was first published in Business Day 

How many times can you say the same thing and still have people come along for the ride? When a process is mired in a lack of transparency can you say the opposite of what is actually happening?

All these rhetorical devices are part of the repertoire of politicians and fine in moderation.

However, two years into the Ramaphosa administration these devices are becoming increasingly dangerous — both economically and politically. This is made worse by parts of the mainstream media ready to regurgitate without critical analysis.

The January 8 anniversary statement was a plea for status quo at state-owned enterprises (SOEs), the centrality to the developmental state and the fact they would all be “fixed”.

Equally it was stated that energy policy and embedded generation was being sorted out.

No, they are not; no, it is not.

There is clearly no fundamental mindset change within the ANC or presidency on the role of SOEs and their inability to manage and be responsible owners of them.

A chief restructuring officer has been appointed at Eskom who has not provided any unique value to the process. The government cannot find good people to join boards or management of SOEs (as most recently evidenced by the SA Nuclear Energy Corporation board appointments and the delays to appointing a new Eskom board).

The energy war room, equally, was instigated as a supposed recognition of the energy policy emergency — to politically unblock the deliberately stalled process by the department of mineral resources & energy. Yet it has not met, yet nor as of last week did it have a terms of reference or advisers at all.

Meanwhile, SAA is on the brink. Something has gone seriously wrong when everyone thought the government was providing money but then they couldn’t because of the law. A business rescue process may well be a necessary political fig leaf for a more orderly form of liquidation of the status quo (asset sales and so on) but the reality is that this should have been done at speed — especially when there were problems with cash flow and non-appearance of a bailout.

The Eskom chair resigns and the story is allowed to develop that he has honourably fallen on his sword — yet his resignation letter made it clear that he had provided the appropriate warnings to the president in December that a load-shedding-free holiday could not be guaranteed and was clearly resigning then for other reasons.

The government is championing its reform to child immigration rules at the end of 2019, yet this was changed in April 2019, but the department forgot to get the rule change signed into law, causing misery and lost opportunity for tourists.

The line of land reform is continually repeated, and that a constitutional amendment is needed to allow for expropriation without compensation, yet this is unnecessary and is a distraction from the bureaucratic blockages to necessary land reform.

Even the SA Reserve Bank is not immune from this communications challenge and is increasingly being seen by investors to miscommunicate, as it has cut rates without providing an adequate runway of consistent explanations ahead of a likely rate cut by Moody’s Investors Service in March. In November Moody’s was a shock to be worried about and so rates were not to be cut; now it’s something that can be looked through like an oil shock and so you can cut? People are scratching their heads.

The problem is that business and investors are wading through rhetorical treacle — constantly being told things are changing and getting better and actions are being taken when they are demonstrably not, or at the very most, the government is running to stand still. This is why business sentiment is not only not improving but is getting worse and is going to be increasingly hard to turn. Growth forecasts are being consistently revised down, now to about 0.6% for 2020.

Politically the rhetoric we are seeing is providing a continual set of bear traps this administration has laid for itself that a new factional axis within the ANC (and in particular one that is emerging from within the broad Nasrec Ramaphosa faction) can exploit to its advantage and put the president on the back foot and then into a box.

As his own broad coalition starts to crumble, so the president has a choice. There is the repetitive rhetoric and a state-of-the nation address along the same lines as the January 8 statement, the references to not being a dictator and the social compacting to death.

Or there is an alternative route.

Using the term dictator is an unfortunate distraction — a straw-man fallacy. Some secret sauce is needed: picking winners and losers; ruthlessness; moving at speed; yes, breaking things; decisiveness; and the ability to think and incorporate stakeholder perspectives without the death-cult of social compacting. That’s leadership. Being a leader is always some percentage dictator and some percentage clear communications, but mainly its action.

Embrace this, otherwise business sentiment will be elusive and with it growth.

This year will bifurcate depending on the route taken and will be a bumpy and hair-raising ride as a result.

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

Old Mutual’s share price has dropped by 12% since the dawn of the Peter Moyo saga, however the losses aren’t entirely attributable to this as there are many moving parts to the company’s decline in value, says Intellidex’s Stuart Theobald in his interview on The Money Show on 702

Intellidex believes that a key criterion when forecasting economic growth is the pace of reform implementation. In SA it is too slow and Intellidex has cut its long-term GDP growth forecast for 2022-2026 to 1.8% from 1.9%. Featured on 

The lack of panic in government outside of Treasury is one of the issues reinforcing South Africa’s low-growth forecasts, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in BusinessReport

Hopes of substantial economic dividends from a new oil and gas industry are being vanquished

This column was first published in Business Day 

SA is firmly embracing resource nationalism. As the country dives into this uncertain policy approach, hopes of substantial economic dividends from a new oil and gas industry are being vanquished.

The new Upstream Petroleum Resources Development Bill, published on Christmas eve, is the latest and clearest step towards resource nationalism in SA. The bill calls for a 20% free equity interest in all gas and oil exploration and production for the state, via PetroSA. The parastatal will have full voting rights attached to the 20% (known as a “carried interest”), which will presumably mean it will have board seats too. It must also have an operating agreement with the operator of the asset.

This entrenches resource nationalism further after the 2018 Mining Charter, which remains mired in litigation.

The bill fits the direction of evolution of wider African resources policy. The disastrous postcolonial statist model of resource development gave way to the Washington Consensus private sector-led model in the 1980s.

However, driven by domestic concerns that multinationals were getting rich in Africa amid a sea of poverty, a third way has been emerging over the past decade. It introduces the hand of the state to guide the private sector to ensure maximum domestic revenue and development spillovers into the domestic economy from resource extraction.

Resource nationalism of this sort has not yet been properly tested anywhere. Similar laws have been implemented in several African countries in the past few years, including Tanzania, the Democratic Republic of the Congo, Mali and Zambia. In most of these there has been sharply negative consequences for mining investment, and implementation has often been delayed or fudged.

These policy regimes have not yet reached a steady state in which the consequences of the approach can be assessed.

Botswana is often cited as an example of longer-term resource nationalism because of the joint venture between its government and De Beers in Debswana. But this single example was created in a different era and the government has been a strongly supportive partner in it.

As oil and gas is a sunrise industry for SA, while it clearly needs new resource opportunities, the stakes are high. Apart from the economic impact of the development of the industry itself, gas has the potential to solve some of SA’s energy challenges as part of the energy mix alongside renewable energy production.

A major offshore gas discovery in 2019 by French producer Total, and shale gas in the Karoo, indicate the potential for a big new gas industry. The SA Oil & Gas Alliance has estimated that the resource discovered by Total could generate R1-trillion of economic activity over the next 20 years.

But the initial bill might be far from what eventually finds its way into law. Minerals policy development in SA has been following a predictable pattern, one that seems undisturbed by Cyril Ramaphosa’s presidency, despite his promises to prioritise certainty. An extreme policy is initially published and then, after vociferous reaction, some middle ground is found. That has been the approach with all iterations of the Mining Charter, as well as the decade-plus of draft amendments to the Mining and Petroleum Resources Development Act.

Policy takes far longer to develop than it should, leading to considerable delays to investment by businesses. SA has dramatically lagged the investment rates of other resource-intensive economies such as Australia, Canada and Brazil over the past decade.

Independent regulators

The carried interest provision of the bill is the most obvious problem. When the government has the power to simply tax an extra 20% of profits, why should it want to own 20% as well? The answer, from a resource nationalist perspective, is that the government’s stake can be used to direct companies to serve the national interest. That is obviously a red flag for private sector investors. Having a shareholder with board seats alongside you whose interests are clearly at odds with profit maximisation introduces considerable uncertainty, while political interests find their way to the board table.

It also means the government faces conflicts as regulator, owner and operator. The resource industry needs clear and effective enforcement of environmental and safety standards, which require independent and tough regulators. While one can imagine a scenario in which the government is able to manage all these conflicts, given the recent history of state-owned enterprises in SA, including PetroSA, confidence is low.

The carried interest proposal should be abandoned. It will not achieve any outcome for the government that can’t better be done through effective regulation and taxes. It merely creates unacceptable risks for the private sector and introduces conflicts for government.

The oil and natural gas industry provides an obvious opportunity to add positive economic momentum while it is desperately needed. The bill is now in a consultation process, providing an opportunity for Ramaphosa to demonstrate in the next draft that he is listening to investors’ concerns.

  • Theobald is chairman at Intellidex

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