Why SA business needs to start negotiating with government

17 July 2023

Transcript of an address to the 1926 Club, Auckland Park, Johannesburg, Tuesday 11th July 2023

Introduction

It is a pleasure to address the 1926 Club. As a former member of the Committee, I appreciate the role that the Club plays in fostering frank and forthright conversations about South Africa’s political economy.

The Club began as a ‘town and gown’ institution, which sought to bring together businesspeople and academics to discuss matters of public interest.

1926 Club members are primarily businesspeople, but they are not exclusively focused on the world of commerce. They understand that business is an integral part of a functioning society and that business leaders have a role to play in shaping the direction of the country.

The point I would like to make tonight, and which the Free Market Foundation is increasingly going to make in the public discourse, is that business in South Africa needs to recognise its significant bargaining power and in so doing, adopt a different strategy in its dealings with government.

Instead of the consensus-seeking approach, business must adopt a mindset of negotiating with government. This I believe is a subtle, but significant mental shift which will ultimately yield better results for business itself, and in the long run achieve a more healthy and sustainable relationship between business and government.

Keep your head down

Business in South Africa, and by this, I generally mean Big Business, has tended to be acquiescent in its relationship with the post-1994 government. There are sometimes good reasons for this. Business leaders who have occasionally dared to be critical of government have often regretted it.

In 2004, Anglo American CEO, Tony Trahar, who at the time was busy relocating the mining giant’s primary listing from Johannesburg to London, was quoted in the Financial Times:

"I think the South African political-risk issue is starting to diminish - although I am not saying it has gone," Trahar said.

For these words he was given a very public dressing down by Thabo Mbeki in the President’s weekly newsletter, ANC Today.

In 2012, then chairman of Nedbank, Reuel Khoza – who received the Free Market Foundation’s Luminary Award in 2016 – wrote in the bank’s annual report that:

“Our political leadership’s moral quotient is degenerating and we are fast losing the checks and balances that are necessary to prevent a recurrence of the past.”

For these remarks he was castigated by then Secretary General of the ANC, Gwede Mantashe, who accused him of ‘bad mouthing the country’ while Higher Education Minister, Blade Nzimande said that Khoza’s comments were part of a “media-backed liberal offensive” to discredit the ANC’s leadership.

The following year, 2013, First National Bank ran an advertising campaign showcasing the views of young people. In one online video, a young participant says: “Stop voting for the same government in hopes for change – instead, change your hopes to a government that has the same hopes as us.”

This the ANC called a “treacherous attack”, even threatening to cancel government contracts with the bank, casually conflating party and state. Feeling the heat, FNB later apologized and removed some of the videos from YouTube, allegedly out of concern for the welfare of the children featured in the commercials.

Considering this bullying from the ANC, it is perhaps understandable that CEOs of major listed entities are reluctant to oppose the government. It is easy to be critical of business leaders, but your typical South African CEO is in a difficult position. He or she is accountable to thousands of staff and shareholders, board members and demanding customers, all of whom have their own interests which need to be balanced.

Government can also threaten to freeze critical companies out of lucrative procurement contracts or refuse to renew operating licenses. Regulatory action can also be used as a weapon against firms. Competition policy is a notable example of this. Using the arms of state for spite and point-scoring is one of the more insidious, silent threats to the rule of law.

However, business started to come out of its shell during the so-called ‘State Capture’ period, which reached its zenith in December 2015, when President Jacob Zuma unexpectedly fired then Minister of Finance, Nhlanhla Nene, and replaced him with ANC backbencher, Des van Rooyen.

This triggered capital flight and a rapid depreciation of the currency, which galvanized the business community into action. Zuma was soon forced to sack Van Rooyen, who henceforth became known as the ‘weekend special’ Minister of Finance. He was replaced by the more acceptable Pravin Gordhan.

Prominent business leaders suddenly found themselves drafted into the campaign to defeat Jacob Zuma and his proxy candidate Nkosazana Dlamini-Zuma, providing resources and public endorsements to Cyril Ramaphosa ahead of the 2017 elective conference at NASREC.

Ramaphosa won the presidency on the back of a broad coalition of trade unionists, provincial bosses, and the South African Communist Party. But the public backing of Big Business was decisive in his ascent to power.

While many commentators expected Ramaphosa to usher in a “New Dawn” of economic reform, the Free Market Foundation and my erstwhile colleagues at the Institute of Race Relations (IRR) were somewhat more incredulous.

We were unfortunately vindicated when a raft of hostile policies soon found their way onto the policy agenda, including Expropriation Without Compensation (EWC), National Health Insurance (NHI), a tightening of labour laws, and a ratcheting up of race-based empowerment, not to mention a general uptick in regulatory burdens across the economy.

Ramaphosa’s presidency was also characterised by the Covid-19 lockdown, which saw large swathes of the economy shut down under draconian emergency measures. Who could forget the prohibition of alcohol and tobacco, the restrictions on e-commerce, as well as the banning of the sale of open-toed shoes and warm chicken, all of which did massive damage to incomes and livelihoods in a country already suffering from chronic low growth and high unemployment. While South Africa wasn’t the only country to impose restrictions, these measures were particularly misdirected.

Business, for its part, stepped up to provide resources and relief measures, in the form of the Solidarity Fund and other initiatives. Unfortunately, big business was all-too-eager to implement lockdown measures without much protest against the more arbitrary and harmful dimensions of it.

Then, in July 2021, after months of stringent lockdown and rising frustration, KwaZulu-Natal (KZN) and Gauteng erupted in civil unrest and violence that was estimated to have caused R50 billion worth of economic damage. Family-run businesses that had taken generations to build were wiped out overnight.

The deteriorating business environment

Today, we have a new set of problems, and the deteriorating business environment is showing up on many companies’ balance sheets.

Real GDP growth in the first quarter of 2023 was a mere 0.4% q-o-q, after contracting by 1.1% in the fourth quarter of 2022. In his Budget Speech in February, the Minister of Finance, Enoch Godongwana, estimated that growth for the next three years would average 1.4%.

Although we are currently experiencing a modest reprieve in loadshedding, 2023 has so far been the worst year on record since the electricity crisis began 15 years ago.

In March, MTN reported in its 2022 annual results that power outages cost the telecoms giant R695 million for batteries and diesel generators to keep its cellphone network operating through blackouts. In May, retailer Pick n’ Pay reported that it was spending up to R60 million per month on diesel.

In February, the Financial Action Task Force (FATF), a global anti-money laundering and terrorist financing watchdog, placed South Africa on its ‘greylist’, joining the likes of Cayman Islands, Nigeria, Panama, and Syria.

This followed a series of downgrades by credit ratings agencies, which has seen the cost of capital escalate. Sovereign borrowing continues to rise, with National Treasury projecting a 73.6% debt-to-GDP ratio by 2025/26. Debt service costs will account for 18% of government spending or R340 billion in this financial year, larger than the entire health budget of R251 billion (or 13% of total government expenditure).

South Africa’s non-aligned position on the Russia-Ukraine war was exposed as a farce by joint naval exercises conducted with Russia and China in February, and the still unexplained docking of the Russian vessel – Lady R – in Simon’s Town naval base last December.

These actions have also put South Africa’s relationship with the United States and other Western allies on the rocks. Consequently, SA’s ongoing inclusion in the African Growth and Opportunity Act (AGOA) – which provides preferential access to US markets – is now in jeopardy, which could risk billions of rands in trade and investment.

On 1 January, the Rand sat at 17 to the US Dollar. By May, in the wake of the US Ambassador Brigety’s allegations that South Africa may have loaded arms and ammunition onto Lady R for Russia’s benefit, the Rand plummeted to a record low of R19,80 to the dollar. It has since recovered modestly to about R18,70 to the dollar.

Speaking of ports, South Africa’s commercial harbours rank towards the bottom of the World Bank’s 2022 Container Port Performance Index (CPPI). Of the 348 total international ports and facilities ranked on the Index, the Port of Gqeberha (formerly Port Elizabeth) ranked 291st, Durban 341st, and Cape Town 344th.

Our poor port rankings are partially due to South Africa’s failing rail system, which has been badly mismanaged by the state-owned entity, Transnet. This has resulted in lost exports amounting to roughly R150 billion over the course of 2022, according to Minerals Council South Africa.

Meanwhile, criminal syndicates extort protection money from construction companies (approximately 180 infrastructure and construction projects, estimated to be worth R63 billion have been targeted by the construction mafia).

This past weekend, on the eve of the second anniversary of the July 2021 riots, six trucks were torched near Van Reenen’s pass on the N3 national highway. The reasons for the violence remain unclear, but the attacks were a cogent reminder of the fragile security situation in KZN and the vulnerability of the road freight sector, which now transports 80% of South Africa’s goods.

Is business (finally) finding its voice?

These factors have combined to build pressure on SA’s business leaders, who in turn have started to voice their frustrations in public.

And their outspokenness has not gone unnoticed by the government. Speaking at the Mining Indaba, in February this year, Cyril Ramaphosa berated the private sector, saying they should “get out of their armchairs and work with the government.”

In response, an indignant Cas Coovadia of Business Unity South Africa (BUSA) said that business has been “busting our butts to work with the government”.

In March, there began a growing chorus of CEOs openly criticizing government’s ineptitude including Ralph Mupita of MTN, who warned that South Africa risked becoming a failed state.

Speaking to SA’s ambiguous stance on the war in Ukraine, Allan Pullinger of FirstRand said: “My personal view around SA’s stance on that invasion — I think it’s despicable that we can’t find it within ourselves to call it out.”

Pullinger then went on to warn that the threat of being sanctioned and locked out of the international payments system posed a “catastrophic risk” to SA’s financial system.

In a similar vein, Sim Tshabalala, CEO of Standard Bank, told the Sunday Times, that “we worry intensely that policies or political positions that get taken will prevent us from [accessing capital markets]”.

Then in May, Fani Titi, CEO of Investec complained that “We are going nowhere fast. The government is disorganised. Totally disorganised.” Also in May, Magda Wierzycka – CEO of financial services company Sygnia – boldly told 702 radio station that South Africa has already crossed the line into a failed state.

The Partnership Initiative and the need for ‘consensus’

Seemingly in response to this growing public pressure, on 7 June, the South African government and organised business announced the establishment of a new Partnership Initiative. A joint press statement announced that the initiative is intended to “remove obstacles to inclusive economic growth and job creation.”

The Partnership Initiative consists of three separate work streams, focusing on energy, transport and logistics as well as crime and corruption respectively.

The National Energy Crisis Committee (NECOM) will focus its efforts on the Matla, Kriel, Majuba, and Kendal power stations.

The National Logistics Crisis Committee (NLCC) is designed to improve rail corridors and finalise the private-sector framework in the rail sector.

And the Joint Initiative to Fight Crime and Corruption (JICC) is intended to build capacity in the National Prosecution Authority (NPA), Hawks, and the Investigative Directorate (ID).

Keen to avoid accusations of usurping government functions, the joint statement noted that, "Business will provide support, on a carefully governed arms-length basis, to combat crime and corruption, in particular, expert resources to further capacitate the NPA and the ID."

The problem with ‘partnerships’

This partnership initiative is the latest iteration of the “social compact” model, a concept which has been heavily promoted by Ramaphosa throughout his Presidency.

There is a misplaced idea in South African public discourse that in order for society to work everyone needs to agree. They may seem fairly innocent motherhood and apple pie stuff, but ‘social compacts’ are actually quite insidious.

These compacts tend to focus on the narrow areas in which the participating stakeholders can agree, which invariably focus on the “low-hanging fruit” like the need for broadband spectrum allocation or e-visas. This produces fake compacts that are not durable.

Business should not lose its voice simply because it is engaged in partnership initiatives with government. I expect that these initiatives are undertaken, in part, by politicians hoping to silence the necessary criticism coming from business leaders. My message to businesspeople would be to continue with the public criticism, even if government starts to do better. Keep your voices loud and clear, while at the same time working with government where it serves your interests to do so.

Social compacting is part of the façade of ‘access’ that government often seduces the business community with.

Make sure that if you do back a horse in political contests, you have actual leverage and actual influence to achieve the ends you hoped your preferred candidate would achieve. Do not simply fund a political party and think that this buys you ‘access’ that can be turned into concrete reform.

‘Access’ has in fact proven to be something that has had the opposite effect. It co-opts business into legitimising bad and malicious policy while business itself gets nothing tangible in return. Sitting around the table at NEDLAC or other forums is only useful to government in that it can tell the public that it has engaged widely with business and labour stakeholders while in fact pursuing its bad policy agenda regardless.

If you want to be able to do something with ‘access’, you need to get a little more Machiavellian. Access should be used for leverage. Without using access to achieve something tangible – as opposed to simply having a ‘good relationship’ with regulators – it tends to accelerate bad policy and prolong our society’s pain under the yoke of a malicious government.

Hostile policy

Social compacts also tend to ignore the elephant in the room: the deeply ideological orientation of government policy which is intrinsically hostile to a market-based economy.

Every business leader should get their hands on Dr Anthea Jeffery’s new book, Countdown to Socialism, which catalogues in meticulous detail the ANC’s guiding philosophy of the National Democratic Revolution. Through ‘dexterity in tact and firmness in principle’ the NDR seeks by incremental stages to move South Africa away from capitalism towards socialism. To achieve this end, Dr Jeffery writes, capital must be ‘disciplined’ and ‘directed’ by the ruling party.

The NDR has played out in a number of key policy domains, including:

- EWC – insecure property rights is the death knell to any economy, let alone a highly fragmented society like South Africa.

- Employment equity – which amounts to racial engineering by the state and effectively empowers the Minister of Labour to determine the composition of a company’s payroll.

- NHI – public healthcare has fallen apart, and government believes the solution is to effectively nationalise private healthcare. I am pleased to note that Busi Mavuso of Business Leadership South Africa (BLSA) has come out strongly against this policy.

- Prescribed assets – government has staged a strategic retreat on this, but it will be back.

An alternative approach

As the business community Sakeliga has often pointed out, business is a crucial component of a healthy constitutional order. As business people, you have a constitutional role to play in our society. You are not a support mechanism for government and its agendas. You have and must have your own agendas: to make money, to provide goods and services, and to allocate scarce resources in the way that most benefits economic growth and job creation. You must be a check and a balance on government, rather than an amplifier of its power over society.

We hear a lot of commentary about business’ leadership role. But leadership is not a popularity contest. Leaders have a duty to defend the interests of those who they represent. That requires making unpopular decisions and, if needs be, alienating those on the other side of the negotiation table.

Here one must understand that business should never allow itself to be co-opted into being ambassadors of bad policy. Dis-Chem learned this lesson the hard way when it set – for itself – high employment equity targets to satisfy the racial requirements of the Department of Labour. Dis-Chem should instead have stood up for its staff, and done only the bare minimum to comply with the racial regimentation expected by this government. Bare minimum compliance with evil policy has a proud tradition among Big Business in South Africa, which stood opposed to Apartheid for decades. This was the leadership South Africa sorely needed.

And to fully realise this leadership role, business must shift from attempting to build consensus with government, to a posture of negotiation. It’s time for business to understand its significant bargaining power. Currently business ‘engages’ with government from a position of assumed weakness, when government is in fact the weaker party. Government needs business, not the other way around.

Government has failed to provide the enabling environment that in theory it should be providing. It has made doing business very difficult, and it is collapsing the economy while business and civil society desperately tries to keep South Africa working.

Negotiation is part and parcel of doing business – hostile takeovers, haggling over contracts, going to court, striking deals. Business should not just play hard ball with each other and with consumers, but also (and especially) with government. The central premise of the rule of law is that in society all are equal, government, business, and civilians. By treating government as a special category of social actor, we move away from the spirit of equality before the law.

Negotiation is about give and take, not only give. Government’s ‘assurances’ are often meaningless – it ends up conceding very little, while business concedes the whole field. Instead, business must demand immediate and tangible reforms before committing to any indefinite or permanent partnership.

Business should also demand tangible and concrete ‘reforms’ immediately. Not abstract hopeful ‘end of loadshedding’ or ‘end of corruption’ outcomes in time. Here we should differentiate between ‘outputs’ and ‘outcomes’. Immediate outputs must be insisted upon. Outcomes are the things we hope for.

Some immediate outputs that business should insist on: the new Eskom CEO must be contractually empowered to take decisions on human resources and procurement without having to play politics with Ministers. Business leaders must make up the majority of the Eskom board.

The business community must also demand that it take over critical functions that have up until now been monopolised by the state, such as rail, ports, and the post office. These entities should be privatised not in a haphazard disorderly way (SAA by way of example) but in a structured and orderly way that still preserves the underlying value of these entities.

Reclaiming the moral high ground

In the recent past, business has tended to focus on superficial issues and outcomes, instead of the more substantive, underlying toxic ideology of government. The most superficial, has been the constant insistence on so-called ‘certainty’, as if a bad and destructive policy is fine so long as it is clear and certain and permanent.

Of course, clarity and certainty are important, but the policy must also be good natured, well intended, and respect the autonomy and vital interests of business and civil society. It is not that we want a more certain and clear form of expropriation without compensation, but we want no expropriation without compensation whatsoever. And if certainty is what you want, then you need less discretionary power for the state.

Business must also rediscover the moral rightness of its profit-seeking nature. Making money is not something to be ashamed of. It is not something to be punished for with higher taxes. It is not something that automatically means one must support government’s social welfare initiatives. When business makes good money, it lifts up the whole of society. The only way you make money is by providing South Africans with the things that they need and desire. When you do this well, they reward you with even more money.

Government will often tell business that government has a democratic mandate to implement hostile policy, but business must retort that it has a clear market mandate, from its millions of consumers, to continue doing business as effectively as it can. The profit motive is the engine that drives the development of any society, and it is not something to apologise for, and certainly not be the victim of malicious policy for.

It’s time for business to abandon the consensus-seeking model. It needs to adopt a firmer posture and start negotiating for the future prosperity of South Africa.

David Ansara is CEO of the Free Market Foundation.