Eskom’s survival critical to SA’s resurgence, says former Investec chief

JULIE LEIBOWITZ

“We’ve got to understand the devastation that took place over the past ten years, and the impact it has had on the economy. The challenge is how we fix it,” Koseff told the annual Helen Suzman Foundation Memorial Lecture in November 2019. Koseff was with Investec for 39 years, including 22 years as chief executive.

The core challenges that face us are how to grow the economy, fix state-owned enterprises (SOEs), and deal with the bloated state. We need to improve confidence, and move away from a developmental to an entrepreneurial approach to running the country.

“We have an economy that structurally can’t grow,” Koseff said. “If we go back to 2007, before the financial crisis, the economy was growing at between 5% and 6% a year. Investec economists have determined that our GDP (gross domestic product) would have been about R1.3 billion higher had we grown at our pre-crisis growth rate. Instead, we went downhill to the 0.6% growth that we have at the moment. Our debt-to-GDP was 26%. As the minister of finance mentioned the other day, it’s now at 60%, and on its way to 80% if we don’t do anything about it.

Illustrating the “total dysfunctionality” of South Africa’s SOEs, Koseff pointed out that Eskom’s generating capacity today is the same as it was in 2007 when it owed R40 billion. Today, the cost of electricity is higher, and it owes R450 billion, while struggling to produce what’s required for us as a society.

He stressed that we need honest, disciplined government. Building confidence should include taking “corrective action” and “putting people in jail”. Similarly, uncertainty in social and legal areas such as land expropriation must be resolved.

“We can’t have a situation where our debt-to-GDP keeps on increasing,” he said. “At Eskom, they can keep transmission, but the power plants need to go into private hands. The midlife plants still function, but the new ones don’t work. They may have to scrap them, in spite of having spent R300 billion. These are tough decisions.

“To build a society that grows and develops, you have to become business-friendly and growth orientated. This isn’t to say that we don’t understand that our growth needs to be inclusive – it’s right for us as a country to uplift people from poverty. But this can only be achieved through business-friendly policies that enable growth and create jobs.”

Koseff addressed the role of those to the left of the political spectrum. “The day unions understand that their role should shift from defending jobs to creating jobs, is the day the economy will start moving. Australia was socialist and had to reform as it was in a recession. Israel was socialist with inflation of a 1000%. In 1988, the country’s debt-to-GDP ratio was 150%, today it’s 60%.”

An entrepreneurial economy, Koseff explained, is one in which people are empowered to simply “get on with it”. There must be incentives for taking the risk of starting a business. “There is a lot of red tape. A big challenge is that a lot of start-up businesses, particularly smaller SMEs, battle with BEE (black economic empowerment) codes and that kind of thing, also minimum wages.

“Maybe you should lower tax rates for small business. Push VAT up, cut corporate tax, and encourage investment into our country. Use some of the extra VAT to help at the bottom of our society through social grants and exemptions on certain products. Change the narrative to [one of], ‘We support entrepreneurs; we support people who start businesses; we give incentives to small business where they are creating employment.’”

Koseff stressed the importance of fixing the education system as a long-term goal in order to ensure that it isn’t only those who go to private schools that get all the opportunities. So too, he said, is the need to address the skills shortage by allocating more work visas for skilled people.

When asked what the private sector could do, Koseff pointed to significant political interventions by the business sector during the term of former President Jacob Zuma, and the creation of the CEO Initiative, which pledges to do the right thing for the country.

“Being a co-chair of the Youth Employment Service, I go around to large businesses like a salesperson and ask them to give internships and help train and develop youth. But they are just looking at their return on equity and how to satisfy their shareholders. They need to learn that in a society like South Africa – even throughout the world – business has a much bigger responsibility than just maximising returns.

Asked what the private sector could do to help avoid a ratings downgrade post budget in 2020, Koseff said, “The recent policy paper on how to fix the economy released by the finance minister is the first positive thing I have seen for a while. Maybe it’s not perfect, but there is a lot in it that, if executed, will start transforming our economy.

“It’s a tough order,” he said [regarding the decision by Moody’s], “because we’ve got until February. They are watching to see whether there is the political will to deal with the issues – whether the president will tackle the left of his party, as that’s what’s in his way right now. If he does so successfully, we can fend off a downgrade. I’m not saying we have to cut pay, but they have to lighten the load. We have to build the capable state that they identified in the National Development Plan.

“With monetary and fiscal discipline, we can defend the value of the currency. That’s important, as you then defend yourself against inflation, and you end up with lower interest rates. I lived through two periods where interest rates went to 25%. Now there are youngsters here who have just taken out mortgages on their homes, at 8% or 9%. I want to ask them how they will afford it if rates go to 20% or 25%? You don’t want to go down that road.

“But you’re not going to be able to have fiscal discipline if government continues to spend irresponsibly. The minister has to discipline his colleagues. We need to support him on this front. We also need private-sector growth which requires confidence. We have to make sure that property rights are secure. We need to create confidence amongst South Africans so that instead of putting all their money into dollars, or whatever, and emigrating, they start investing. That’s our challenge.”