Business leaders fear South Africa risks becoming a failed state

BRIAN NEELEY

When Cyril Ramaphosa became president of South Africa in 2018, business leaders were overjoyed. Here was one of them: a pragmatic tycoon out to fix Jacob Zuma’s inefficient kleptocracy. Yet five years later, those running big businesses are desperate. Bosses from many different industries—such as Neil Frohnman of Siboney-Stillwater, a mining company; Daniel Miminelle, incoming chair of Nedbank; And Ralph Mupita of telecoms firm MTN has sounded the alarm. Could South Africa Be Becoming a Failed State?

Already in 2023, blackouts by Eskom, the power utility, have surpassed those of 2022, the worst year ever on record (see chart). Businesses are planning for a total collapse of the grid. “If this crisis continues, we will not be able to guarantee a stable supply of food, medicines and other essential goods,” retail owners wrote in a letter to the president in February. Morale plummeted when earlier this month the US ambassador accused South Africa of secretly sending arms to Russia.

CEOs have left it to Mr Ramaphosa to fix the problem on his own. So, companies are sending employees to government departments, including their offices: a very South African solution. The resourceful seek private alternatives to the public sector: health insurance, private schools and security, or solar panels on homes. It also shows the scale of the crisis.

The relationship between big business and government dates back to 1994, when Nelson Mandela and his African National Congress (ANC) came to power. As international firms and capital left South Africa in the 1980s, the domestic conglomerates that dominated South African business grew. By the end of the decade the three companies controlled the Johannesburg Stock Exchange (JSE) accounting for 75% of the market value. But some tycoons saw that white rule was untenable. So in 1985, defying the wishes of the apartheid regime, the chairman of Anglo-American took a group to meet exiled leaders of the ANC. One representative, upon meeting Thabo Mbeki, jokingly told the future president: “Welcome to the bourgeoisie.”

Those talks led to an unwritten deal. The ANC will drop its pledge to nationalize large companies. Business would embrace affirmative action and enrich a black elite, which notably includes Mr Ramaphosa. In other respects, little changed in the basic structure of the South African economy: many of the same large firms are still dominant—and feel less competitive pressure than counterparts in other parts of the world. According to IMF research, markup by publicly listed firms increased by 25% from 2000 to 2016. Globally the average increase was 6%. Persistent markups, i.e. prices above the marginal cost of production, indicate a lack of competition.

Problems are solved privately. In 2015, Mr. Zuma replaced a respected finance minister—who had helped block a multi billion-dollar nuclear-power deal with Russia—with an obscure parliamentarian. The industry giants called a meeting with ANC bigwigs including Mr Ramaphosa, who had by then made a fortune and returned to politics. Mr. Zuma changed sides.

Yet today’s crises cannot be solved with a quiet word. Bosses usually cite three issues: power, logistics and crime. Last year the power cut could have reduced GDP by 7-8%; 2023 could be even darker. The blackout caused South Africa to go from the most reliable of MTN’s 19 African networks in early 2022 to possibly the worst a year later. The biggest supermarket chain says spending on diesel for generators could cut profits by 7% in 2022.

Transnet, the state-owned firm that operates freight rail, has, like Eskom, been battered by allegations of corruption and mismanagement. Last year, miners lost out on abandoned exports worth 300 billion rand ($16 billion), largely what they managed to sell abroad because they couldn’t move their cargo out of the country, according to Stellenbosch University’s Jan Hewenga. Could Transnet move less general cargo – excluding minerals and metals – than at any time since the 1940s.

badass factor

Crime spoils everything. At least 183 infrastructure projects were disrupted in 2019 by “construction mafia” demanding jobs and bribes. The theft of cables from Eskom, Transnet and passenger railways cost South Africa an estimated 50bn rand in 2022, roughly the same as the economic contribution of the wine industry. Andre de Ruyter, the former head of Eskom who courageously tried to root out corruption, was nearly fatally poisoned in December. (Don’t use personalized coffee mugs, he says when asked if he has advice for his successor.) Western officials worry that South Africa is drifting toward money-laundering that is a threat to venture capital. Silicon Valley is for In February, the Financial Action Task Force, a global watchdog, put the country on its “grey list”, meaning South Africa’s banks and authorities will come under greater scrutiny.

Mr Ramaphosa has repeatedly vowed to catch up. Alas, he had failed. A CEO draws a two-by-two diagram, which is preferred by management consultants. One axis is called “morality”, the other “competence”. Mr Ramaphosa has been placed in the ethical but incompetent category, while Mr Zuma was clearly unethical as well as incompetent. When US Treasury Secretary Janet Yellen visited South Africa earlier this year, the CEO asked her to speak sense to the president.

“Earlier this year we realized we were on the edge as a country,” says Martin Kingston, president of Business for South Africa, a pan-industry body. “We realized that the status quo was not sustainable.” Drawing on the experience of procuring protective gear and vaccines during the pandemic, trade groups formalized only ad hoc efforts to aid the government.

For many years firms have sent employees to help run government departments while paying their salaries. Corporate lawyers work in the Prosecuting Authority, bankers work in the Department of Industry. Many Anusevas are involved in Operation Vulindlela (“Make Way”), a joint initiative by the Presidency and the Department of Finance to defeat bureaucratic inertia.

Last year, a new body was set up in the Presidency to reform the electricity industry. In March Mr Ramaphosa said the private sector would pay into the Resource Mobilization Fund (RMF), a whip-round designed to hire external consultants. The RMF may also pay for a private team to try to improve the logistics. “The aim is to create a parallel system of institutions to work at the moment,” says Morris Mathombeni of the Johannesburg-based Gordon Institute of Business Science. Business groups insist that their efforts will be transparent. And this approach offers a better chance of success than relying on cabinet ministers who are innately skeptical of the free market.

But critics still worry about how the business is behaving. Ann Bernstein of the think-tank Center for Development and Enterprise argues that organized business had, at least until recently, a case of Stockholm syndrome. “He has covered for a failed president.” It would do well for business leaders to tell the public the true extent of South Africa’s crisis.

South Africans can listen. South Africans said they trust business more than government, media or NGOs, as part of a global survey published earlier by Edelman, a US consultancy. In fact, the 40 percentage point gap between expressing confidence in business (62%) and government (20%) was greater than in the other 27 countries polled.

Mr De Ruyter argues that business is still too timid when it comes to calling out corruption. He was “frustrated” by the reaction of other business leaders after he was poisoned, many of whom sent private messages but remained silent in public. “But that’s culture,” he sighs.

According to Msebesi Jonas, a former deputy finance minister, “You can’t fix the country’s problems until you recognize that the ANC can’t be fixed.” The ruling party, he points out, is “fundamentally statist”. The situation is so dire, he says, that society could “explode at any moment”.

“This is a 1985 moment,” argues Songzo Zibei, a former business-newspaper editor and corporate executive who founded his own political party in April. Although he admits that no single firm has the power that the Anglo-American conglomerate did in the 1980s, he says that business today must show the same courage. Instead of participating in yet more state-led initiatives, the top 40 or 50 CEOs should gather with unions and NGOs to hammer out a new “social contract”. He insists that any form of technical assistance will not reform the government. “Unless you change the politics, you won’t solve the problems.”

market-unfriendly

Businesses are unlikely to accept such proposals—and not just because they’re fuzzy. “Whether you like it or not, the ANC is government today and will be the largest party tomorrow [ie, after the next election, due in 2024], It would be foolish not to talk to him,” Mr Kingston says. The firms are already wooing Paul Mashatile, who became Mr Ramaphosa’s deputy in March and his most likely successor. We can do business,” says one CEO. He omitted to mention that the same was said of Mr. Ramaphosa.

However, calls for help in Mr Ramaphosa’s office show that large companies no longer feel insulated from South Africa’s problems. Potential competitors are relatively scarce: the World Bank suggests that South Africa should have a third of small businesses when looking at per capita GDP. Most of the revenue earned by the 40 largest JSE-listed firms comes from outside South Africa.

But there are limits to what even the largest firms can do to protect themselves. Mike Brown, CEO of Nedbank, says the larger companies will probably be able to iron out the problems in less time. “But in the long term our fate is linked to the success or failure of the South African economy,” he lamented.

Mr. de Ruyter puts it more clearly. Over poisoned coffee, he worries about what will happen if the country continues its downward spiral. “You can have solar on your roof, live in a gated estate, have private security, have a holiday home. But if 90% of the population is suffering, how is it sustainable?”

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