South Africa at 30: SA Inc on the starting line

The long-awaited new democracy may have dawned on investors a few days before the historic general election of April 27 1994. By mid-April the country was still on a knife edge — violent right-wing insurrection, the Shell House massacre, car bombs and a state of emergency declared in KwaZulu-Natal. Investors were understandably jittery. But just five days before the election, ANC leader Nelson Mandela was ushered onto the JSE’s hallowed trading floor in the old Diagonal Street building.

A composed and disarming Mandela told the assembled throng of traders that the JSE had already started to respond positively since the lifting of sanctions and the pending formation of a democratically elected government. “This will bring the stability that is needed for the investment potential of our country to be realised. In this regard, it is our concern to restore economic stability in this country,” he noted.

Mandela was right ... at least for a while.

The mid- to late 1990s was an extraordinary period for business. The sheer number of new listings to the JSE — mostly entrepreneurially driven ventures emboldened by the prospect of an open economy and strong flows of new capital from international investors — was breathtaking. Hundreds of counters rushed to the JSE. The newly listed shares proved popular and many public share offerings were heavily oversubscribed. Stalwart counters such as Naspers, Famous Brands (then Steers) and MTN (initially M-Cell) listed, while PSG Group — arguably the most rewarding longer-term investment opportunity in the history of the JSE — reverse-listed in 1995 (at a price of just 30c).

The first black empowerment investment companies emerged with New Africa Investments Ltd and Real Africa Investments becoming the poster children for a wave of BEE listings.

With the prospect of nationalisation still spooking some investors, it would have been reassuring to see the emergence of leading trade union figures as “capitalist comrades”. Union stalwarts such as Cyril Ramaphosa, Johnny Copelyn, Marcel Golding and Jay Naidoo veered away from politics and played important roles in fostering efforts to build black wealth.

The JSE was also boosted by the demutualisation of large life assurers Sanlam and Old Mutual, while the old mining houses restructured to bring in new empowerment investors ... and a couple of them secured primary listings on the London Stock Exchange.

Then came the foreign banks — not only looking for new business opportunities, but also to snap up strategic stakes in stockbroking firms ahead of the deregulation of the JSE.

There were some intriguing deals: Nedbank’s unsuccessful tilt at larger Standard Bank and the old SA Breweries’ sale of iconic retailer OK Bazaars to Shoprite for a nominal R1.

Matters came a bit unstuck in the late 1990s when extraordinarily high interest rates put a spoke in the deal-making wheels. Highly geared empowerment companies were immediate casualties, their assets simply not able to generate the profits and dividend flows required to service ballooning interest charges. Matters were not helped by the Russian debt crisis, which put the mockers on emerging markets.

While hundreds of billions of rand of BEE deals were notched up, only a few of the pioneering BEE companies endured — most notably Patrice Motsepe’s African Rainbow Minerals, the South African Clothing & Textile Workers Union-aligned Hosken Consolidated Investments and Cape Town-based Brimstone Investment Corp.

As stand-alone empowerment ventures stuttered, individual companies clinched broad-based BEE deals — once again many highly leveraged and sometimes in need of bailing out. Ultimately, only a handful of prime movers really scored from the advantages offered by BEE schemes so the JSE, at the start of the 21st century, was only slightly altered in terms of ownership transformation.

When the JSE had its opportunistic moments, it was not an over-generalisation to claim that white capital was far more in abundance. One needs to look at the small banking boom of the late 1990s through to 2002, as well as the infrastructure boom in the years preceding the hosting of the 2010 Soccer World Cup.

At least Capitec Bank — a venture started in the darkest days of the 2001 small banking crisis — took several empowerment investors along for the ride when it so successfully tapped the great mass of unbanked people in South Africa.

The manoeuvring by the late Brett Kebble in the local mining sector promised much for black ownership on paper. But this convoluted network of debt-driven deal-making got so entangled that even more damage was done to hopes of finding traction for real economic transformation.

Though South Africa escaped the worst ravages of the 2008 global financial crisis — no small thanks to the Reserve Bank’s determination to retain staunch capital adequacy requirements — the collapsing of “too big to fail” corporations in the US and Europe sent ominous ripples through the investment community. And, every so often, a corporate collapse, from the relatively small implosions of Macmed Health Care, Tigon and LeisureNet to the almighty R120bn blow-up at Steinhoff International.

Then there are the stark reminders of the lingering disparities in business — where the gap between top executive pay and the wages of a humble employee can be startling. In 2013 a strike over a R12,000 minimum wage culminated in a tense standoff at Lonmin’s Marikana platinum mine, where police opened fire and killed 34 mineworkers.

Maybe 2015 was the year that investors and business leaders were the most stress-tested. Xenophobia, the EFF’s parliamentary antics, the fees must fall campaign and the Omar al-Bashir incident. Of course, the currency-bruising event came when Jacob Zuma removed highly regarded finance minister Nhlanhla Nene and replaced him with inexperienced backbencher David Des van Rooyen. A few days later Zuma went back on his decision — apparently at the behest of big business — appointing Pravin Gordhan to the portfolio. The first murmurings of “failed state” were audible, especially as the facts about costly state capture activities were increasingly exposed.

Investment levels, at least on the JSE, seemed to crimp from around 2017 — even if three other rival stock markets started up. The number of listings has declined consistently over the past eight years, with local entrepreneurial ventures preferring international private equity backing or merging into global entities. The JSE’s collective market capitalisation grew — but mainly due to global listings such as Naspers/Prosus, Richemont, BAT, AB InBev and the mining giants.

With economic activity stagnant, the last thing business needed was Covid, which put large segments of the economy into lockdown at the end of March 2020.

Despite the dour post-Covid outlook, a few foreign investors were still taking an interest in local businesses. Logistics player DP World bought out Imperial Group in 2022, while snack giant PepsiCo acquired Pioneer Foods. More recently beer behemoth Heineken bought out Stellenbosch-based liquor group Distell. But overall foreign participation on the JSE and associated markets has dwindled.

Today, 30 years after Mandela reassured the JSE about restoring economic stability, business finds itself in need of certainty on power supply, logistical efficiencies and water security. To make matters worse, the competition authorities now have a wider mandate when perusing takeover deals and mergers, and the result is often additional investment costs, frustrating delays and cumbersome directives.

Business would like more urgency and pragmatism on the prevailing challenges. But whether government and business are still on the same page is debatable.

Value Capital Partners CEO Sam Sithole remains optimistic. “It’s been a mixed bag, but there have been positive developments ... establishing an inclusive democracy without the debilitating wars witnessed across the continent, there’s a strong social safety net for the economically vulnerable and a black middle class through a combination of crucial interventions by the government,” he says. “South Africa plays a leading (and positively disproportionate) role on the world stage in the areas of governance, politics, business, sporting achievements. We have a strong civil society — including media and the judiciary — as well as a world-class Reserve Bank and National Treasury.”

But he cautions that areas that need improvement include education, public health and infrastructure development, as well as business-friendly policies. “Just slight improvement in those areas could launch the country into an exciting economic boom.” 

PSG Group CEO Piet Mouton believes the government can still push economic growth markedly. But to do that, he reckons, it needs to grasp the ownership equation in business.

He points out that the only income shareholders receive from owning shares is dividends, adding that the value of any business is ultimately determined by discounting the expected future cash flows from being invested in such business.

“The question then is — does another stakeholder in a business receive more cash from such business than shareholders do and, if so, the only conclusion is that the ‘true’ ownership of that business is different from the current perception of shareholder ownership.”

Mouton argues that the government is a major beneficiary from any business activity. “It is evident that government is the majority ‘owner’ of almost all businesses in South Africa given its entitlement to taxes, duties, levies and the like at various levels (company, employees, suppliers, consumers and so on) — which are significantly more so than what shareholders receive.”

A look at a breakdown in company pretax profits supports Mouton’s notion. If a company generates R100m in pretax profits, about R27m is paid to the government in corporate tax. If half the R73m in after-tax profits is paid out in dividends, then government gets another 20% slice via the dividend tax. So, shareholders in that company would receive about R29m in dividends while government collects R7.3m. Adding in the R27m taken in corporate tax, the government technically owns 54% of that business on a pretax basis — a comfortable position considering it has no capital obligations.

So Mouton says it is in the government’s best interest that businesses flourish. If all businesses doubled in size, the government’s income from said businesses should more than double, he says.

“Greater economic activity will result in more businesses being established and included in the tax net, and existing businesses will grow — thereby increasing the tax base ... Greater economic activity will accordingly lead to higher employment and increased consumer spending — which will result in an increase in all forms of taxes.”

Maybe, by creating an enabling climate for business to thrive for the next 30 years, the government can, in the words of a wise man, restore the stability needed for the country’s investment potential to be realised.