Edition: April/June 2019


Breathe easier

Look at some bright spots. On balance, after the elections the odds are shorter for optimism than pessimism provided that . . .

This pre-elections period is the season of heightened madness. Expect it in vast dollops.

Truths and contexts become casualties, as they invariably do when emotions are let loose on the free-for-all social media. They offer a distorted gauge, as do sound bites from the self-interest of campaign rhetoric, amplifying arguments that stimulate populist response and expectation but belie their capacity for credibility and implementation.

Cool heads risk pollution by hot heads especially within an ANC looking to outflank the Economic Freedom Fighters. With the EFF’s eyes set on ‘kingmaker’ roles in national, provincial and municipal governments, where the ANC might not win outright majorities, some pandering is perhaps strategic for the challenge to be countered. Electoral inflexions are made of dust and return to dust.

There are obviously known unknowns. Particularly amongst them are whether:

  • President Cyril Ramaphosa will emerge strengthened or weakened from his “capture” by resolutions of the ANC national elective conference where he scraped into office by a hair’s breadth. In two years’ time he’ll face the ANC national general council when the faction fighting will again play out. Two years is the maximum timescale that he and the country are up against;
  • Coalitions with the EFF will be entered for the ANC to hold majorities at any tiers of government and, if so, the likely effects;
  • Business confidence is restored. This is essential for him to deliver on promises of increased investment and job creation. At a minimum, it involves the decontamination of state bodies (including the Hawks for obvious reasons) and crucially a turnaround in the electricity chaos. The latter is so severe that Eskom has forced a review of black economic-empowerment policies.
The good, the bad and the ugly

To the extent that the private sector can assist, it must. And it can, not by the continued harping on obstacles but by exploiting opportunities under its control. A case in point is the Financial Sector Code, potentially a game-changer with up to R100bn available for socio-economic objectives. Another is the loads of cash in corporate coffers – unlike the harassed fiscus – awaiting an alert for better use than bank deposits.

It will be a mistake for long-term investors, in SA and from abroad, amongst pension funds and across businesses, to be swayed by the immediate noise. Whilst they can’t be deaf to it, they shouldn’t succumb to it. There are at least three topical reasons.

First, there’re the commissions of inquiry into corruption at key state institutions. Cleverly timed by Ramaphosa, for consolidation of his authority and signal of his intent, boils are being lanced. After the elections, his cause to deal with the puss will be the more blatant. Unless this was originally his intention, the exercises will have been pointless and he’ll be seen to suffer impotence.

Already having replaced directors at government’s dysfunctional agencies and enterprises, the commissions are clearing the way for deepened rooting out of people and practices exposed as useless at best or crooked at worst. Logically, oversight procedures will have to be jacked up so that they actually work. Similarly, criminal prosecutions and civil actions will need to follow.

The process has begun. An antidote to scepticism would be prompt arrests of certain high profile individuals. They know who they are, as does SA at large.

Don’t envy Ramaphosa the enormity and complexity of what awaits him, for tentacles from the Zuma years have had a cancerous spread. Their residue remains not only within the power structures of the ANC, including echelons of leadership, but also amongst party appointees within the public sector.

Such is their vested interest in the perpetuation of nest eggs that they’ll be a constraint on the direction of the wind until they perceive it preferable to blow along with it. Opportunism trumps loyalties.

To move, be certain that Ramaphosa will have the ammunition. Be confident that he also has the balls. Be hopeful that no accident, conspired or otherwise, will befall him. Another succession battle is the stuff of nightmares.

Implementation of his programme cannot be instantaneous. Be patient for remedies to the rot whose astonishing depth is gradually being revealed. Brick by brick, myriad structures will have to be rebuilt at a pace allowed by scarcities in financial resources and skilled personnel.

Second, the proposal in the ANC election manifesto that the introduction of prescribed assets be investigated is a damp squib. The idea has been around for years – well before the crisis in state-owned enterprises, flaunted by the sorts of ideologues who thought that Hugo Chavez was doing a good job in Venezuela -- and it simply won’t eventuate.

There’s neither purpose nor need for prescribeds. It survives in the manifesto because, come elections, it can be propagandised as a stick to wield on “financial institutions’ funds”. Surely the party cannot still be oblivious to the fact that “financial institutions’ funds” belong not to the institutions but to the millions of savers – black and white, rich and poor – in a multiplicity of retirement and insurance products.

The concept of prescribeds is laboured with contradictions. As TT has argued repeatedly, on each occasion that the ogre has arisen, it’s a selective tax; and, at that, a tax by stealth which comes atop the taxes for which fund members are already liable.

Put brutally, it amounts to stealing from people who save; morally tantamount to hacking individuals’ private bank accounts, but with the advantage that the skimming of one or two percentage points looks so minimal as not to be worth the bother of protest.

This is the more so when it’s supposed to be for the social good, which it isn’t. Government cannot on the one hand seek to encourage pension-fund savings, by the plethora of reforms including preservation, while simultaneously on the other hand increase the costs and reduce the benefits by prescribing that they subsidise instruments into which funds wouldn’t otherwise invest for uncompetitive returns.

To reduce fund members’ benefits by a couple of percentage points annually amounts to huge reductions over the membership’s life. Because benefits can increase only by improved investment performance and lowered fund costs, they must be seen in tandem and not as alternatives.

They must also be seen for their likely impact on the pool of national capital essential to fund the fiscus. For individual savers, there’s a hard history of withdrawals when employees become nervous over government interventions. For international portfolio managers, heavily exposed to SA government and government-backed bonds, prescribeds send a message of market interference that will discourage their participation.

In essence, prescribeds are a means of replacing voluntary with forced investments. They’re voluntary when the risk-return rate is decided by markets and forced when it’s dictated by governments. At the same time, in contravention of basic governance principles, they release the bond issuer from the discipline of investors’ oversight.

There are predictable consequences: poorer investment performance by domestic pension funds, relative to returns from assets in which they can invest voluntarily, and hence poorer benefits for members; a review by ratings agencies of SA’s status as a borrower, rekindling the threat of a downgrade to junk; exits by foreigners, because of their mandates, that can shoot up the overall pattern of interest rates.

In the case of the latter, to the extent that prescribeds are required for investment at rates below commercial, any advantage will be more than offset. Additionally, the “social discount” is superfluous because the obstacle is not in a shortage of money but in the availability of projects. Little more can be required by the private-sector institutions, in terms of social initiatives, than the commitments enshrined most notably in the gazetted Financial Sector Code.

Third, there’s land expropriation without compensation. The controversy has been elevated to the most sinister fears and motives by the political point-scoring.

Fundamentally, introduction of prescribeds will amount to admission of defeat that the corroded state-owned enterprises – Eskom to the fore – cannot be pulled right. Introduce prescribeds and tell the world that SA’s market economy is diminished.

Then kiss goodbye to Ramaphosa’s ambitious targets for attraction of foreign direct investment. He, most of all, must be aware of the danger.

Third, there’s land expropriation without compensation. The controversy has been elevated to the most sinister fears and motives by the political point-scoring (TT Aug-Oct ’18 and Nov ’18-Jan ’19).

But contrast the impassioned polemic with the actual draft of the Expropriation Bill, to replace the Act that’s applied for the past 44 years, published for comment in December. It will be tabled, astutely, only for debate in new parliament.

So far downplayed in the pre-election contest is the draft’s modesty. Why a constitutional amendment might be required is obscure. Far from controverting the constitution, the bill offers clarity on the conditions whereby the existing constitutional provision can be invoked; in other words, setting out the grounds for court challenges where the mooted Expropriation Act is contravened.

For example, no expropriation may be done arbitrarily or for anything other than a public purpose or in the public interest. Expropriation may only take place where attempts to reach agreement with the owner on reasonable terms were unsuccessful. Compensation must reflect an equitable balance between the interests of the expropriated owner and the public, having regard to such factors as the current use of the property as well as its history of acquisition and its market value.

It won’t make Julius Malema happy, but so what? The unhappier, the better. The size of the EFF’s support base is magnified by the airtime given to his endless protests and press conferences. So imaginative are his digs for nationalisation, filled with inflammation but devoid of substance, that they’re avoidable potholes on the road being travelled.

Have faith in the direction. It’s incontrovertible that, after the backward lurch of the Zuma years, there’s a forward leap to attain the sort of society envisaged by the constitution in whose Mandela-inspired compilation Ramaphosa’s role was instrumental.

Allan Greenblo,
Editorial Director