As President Cyril Ramaphosa’s announcement, scheduled for a virtual joint sitting of parliament this Thursday, of the details of his economic recovery programme draws near, it is getting harder and harder to see much detail that indicates either recovery or his much-promised reforms.
Obviously it would be unfair not to wait and hear what he has to say but, to a great extent, the flesh and bones of the plans he will present are already clear. And to the extent that they are, there is not much to get excited about. If anything, many aspects of his plan promise little more than a doubling down on old, dog-eared ANC shibboleths, hauled out of the bottom drawer yet again to cheer up the party.
SAA is a case in point. On Sunday public enterprises director-general Kgathatso Tlhakudi, wrote the most remarkable piece on the state-sponsored rescue of the bankrupt airline, revealing, in the process, the true scale of muddled economic thinking inside the government. Right from the start of his piece, the op-ed lead in the Sunday Times, things go horribly wrong.
“A well-run national carrier is vital to the overall logistics network in the country,” he wrote. “The aviation industry, as an apex industry, acts as a ‘force multiplier’ and enables many other sectors that would otherwise struggle without it.”
He immediately confuses an airline, which isn’t worth saving, with an aviation industry, which may be. Perhaps there is a case for the state to (partially) own SAA Technical (SAAT) but as far as I know the department of public enterprises (DPE) isn’t making it. The presence of a strong technical centre like SAAT has been vital to the upkeep of an aviation industry here and could be a strong foreign exchange earner as well if we could persuade other airlines in the rest of the continent to use it.
“Limiting job losses is one of the pillars behind our decisions as it would have been immoral to leave SAA employees ‘in the streets’,” Tlhakudi writes. It makes you want to weep. In the private sector, where risk, jobs and salaries are real, the Covid pandemic has created an extra 2.2-million unemployed people. No-one is asking whether or not this is “immoral”. It is what it is and until the ANC learns to be hard on itself it’ll never get the economy right.
Rescuing SAA to save jobs is a little like diving off Victoria Falls to take a swim — you could get seriously hurt and you’re highly unlikely to feel refreshed at the end of it. You can’t save the SAA jobs. You pay people a decent package and you let them go.
“SAA has the strongest aviation market on the African continent as five of the top highest revenue routes to and within Africa are in SA,” the DG continues, making the case for the state getting out of the airline business altogether and leaving it to private sector companies. If the routes are so lucrative, why would they not?
“Three of the top 10 airports in Africa are in this country and six of the busiest air routes within Africa are in SA,” he says, only emphasising his earlier point. And, then, the cherry on the top ... “It would be reckless of policymakers and authorities to not leverage this competitive advantage to create income streams for our people and entrepreneurs.”
What unadulterated rubbish. The state creating a new airline or rescuing a current bankrupt one creates not one single opportunity for an entrepreneur, be they “ours” (whatever that means) or anyone else’s. In fact, it shuts down the space for entrepreneurs.
But this is how the government thinks. It simply cannot walk away because, as we will see, it always knows best. The fact that SAA has consumed north of R50bn in bailouts under the ANC is nothing, a mere ideological bagatelle. Won’t happen again. “The government has made a firm commitment that the new airline must be commercially sustainable and will not be bailed out by the fiscus for bad decisions and poor governance practices,” the DG asserts, once again blowing smoke.
He cannot possibly have any idea what a commercially sustainable airline looks like from the inside. I remember Alec Erwin promising, on his honour, way back in 2006, that that year’s bailout would absolutely be the very last. It wasn’t, not by a long shot. If I were the strategic equity partner the DPE is so desperately looking for I would run a mile if it were my door they were knocking on.
This is not a government prepared to let go. In fact, anyone would need to be aware that the ANC has instructed the government, its government, mind) to keep SAA alive and that is why it is still at it. So as an equity partner you’re actually getting into business with the ANC. Remember that. They’re lovely people to do business with. You’ve been warned.
While there is neither a hint of recovery nor reform in sustaining a loss-making airline, SAA is not alone. Trade industry & competition minister Ebrahim Patel is also piling into industry as his contribution to recovery.
I have in front of me a freshly minted draft of the coming Steel Industry Master Plan 1.0. It is inviting feedback from the wider steel-making, rolling and fabricating industry before being made law. Or the regulation. Or the way things are going to be done from now on.
“The brief from the minister has been to bring stakeholders together to design a Master Plan which leads to a competitive, dynamic and inclusive industry and which is able to provide a stable platform for investment, growth and job creation,” it says in its introduction. “Key elements of the plan must include greater levels of localisation, while developing platforms to access export markets and position the SA industry to focus on opportunities arising from the African Continental Free Trade Area, expected to come into operation during 2021. The transformation model (‘an inclusive industry’) must simultaneously promote growth and a greater speed of equity. The emphasis in the Master Plan must be on concrete commitments by each of the major stakeholders, namely investors/manufacturers throughout the different steel and engineering value chains; organised labour; supplier and customer industries; and public sector entities.”
That’s quite a mouthful and contradictory too. For while Patel is asking for stakeholders to design a new industry he has some immovable markers already. He wants more localisation, which could have any number of unexpected and unforeseeable consequences. And it “must” promote “a greater spread of equity”. In other words he wants more black players in the industry.
The question is how he plans to get them. Mostly it is through this “localisation”. What he is trying to do is to stem the flow of steel imports into SA and make more here. But the country’s only integrated steelmaker, ArcelorMittal SA (Amsa), like SAA and Eskom a largely crippled quasi-monopoly, cannot compete with the prices of imported (most often Chinese) steel. The prices of its inputs — electricity, iron ore and coal — have risen sharply but the truth about Amsa is that it has produced expensive steel ever since it was taken over (as Iscor) by Lakshmi Mittal, the Indian steel tycoon.
A number of players in the steel business make steel by melting scrap but Amsa is the only real steelmaker. It is closing its integrated export operation at Saldanha, a shock to Patel, and he is determined to save what remains.
It is reasonable to ask why.
Through giant continuous casting machines, Amsa is able to make pig-irons in its unmistakable blast furnaces and pour it into steel slab in a single, beautiful, process. I’m an industrial romantic and a pour is always something to watch. But there is overcapacity in actual steel-making in the world. Amsa produces around 4Mt a year and there is at any one time way more than available on the open market. The shipping costs are negligible.
And while the quality of the imported steel is often superior to what Amsa can produce, its biggest weakness is price. Not long ago the government felt the same way, so much so that it barred Eskom from using Amsa steel on its pylons. Now it’s back in favour, a “strategic” component of our industrial backbone.
Except that it isn’t. It is a large, uncompetitive and often bullying supplier imposing huge costs on local industries, which Patel is now going to protect as part of his localisation project. In fact, what he is protecting, with union support, are around 7,000 or so jobs that will remain when the current round of redundancies has ended.
Downstream from Amsa, fabricators and users of steel employ tens of thousands of people. They are now going to be “persuaded” to use local steel rather than the cheaper imports that make them competitive.
You can spot the ANC group-think here. Eskom, SAA, Iscor — all giants of the colonial or apartheid industrial machine — are somehow as far as the party can think. It cannot see how, if the state only stepped aside, a generation of entrepreneurs, black and white, could be set free to supply whatever markets they can find, at whatever price they can afford, and sustain and grow jobs. In the ANC mind the jobs come before the employer. The steel Master Plan reeks of it.
“South African SOEs like Transnet purchase significant quantities of steel products like rail,” the Master Plan draft says. “Transnet has committed to review requirements and to work with local industry on building local supply chains for large-scale projects and consumables. In addition, government is working with business across the economy, through Nedlac and other platforms, to improve the level and proportion of locally produced goods, including in the hardware and home improvement sector.”
Which is all well and good and it looks so neat when you put it in a central planning sort of way like that. But you’d think the way to get it really right would be to ask the downstream industry what it needs. Instead, the plan will be imposed on them. They can import but stiff duties will apply. Amsa however, will do pretty much what it wants, and remain a direct threat to the very activities Patel is trying to promote. More than one steel trader, for instance, swears to me that it is possible to buy South African (Amsa) steel in Europe and re-import it into SA and still be able to sell it more cheaply than the prices at which Amsa supplies the local market.
And Patel is trapped. Any further pressure on Amsa domestic pricing and it would shut up shop and leave.
What I found most interesting, even amusing, about the Steel Master Plan is that it forces Patel into the uncomfortable corner of admitting that, in order to survive, “industry consolidation may be necessary along certain parts of the value chain”. This from a minister who has built a reputation insisting that the economy needs more, not less, competition.
At least consolidation is a realistic view. The economy has tanked. The rand has tanked. Input prices are through the roof. Who can survive this? Only the toughest fabricators, scrap dealers and producers. The problem is that even if you allow some consolidation it will have little long-term benefit if the industry is to be dominated by untouchable, uncompetitive and expensive quasi-monopolies like Amsa.
The Steel Master Plan’s Action Plan sets very tough deadlines. The president is in a hurry. The industry has just three weeks to consider the draft plan. After that it goes back to the trade industry & competition department, which will “extract the key commitments and timeframes for presentation to the industry”. (You have to love the wording – it’s like the industry is doing this all to itself.)
Then the minister looks at the plan and meets the “industry” to agree terms. They sign the plan. Patel then appoints a Steel Industry Council of “senior industry, union and government” representatives. The council oversees implementation.
I don’t want to be rude. It is obvious an enormous amount of work is being done. But it is at the same time hard to escape the conclusion that this is just another grand idea put together by people with very little at risk in steel. It is certainly no sure way to create jobs.
It would be just as easy to let Amsa fail and import the slab we think we need to supply value-added products to markets that each fabricator or producer finds for themselves, at home or abroad. That way input prices would at least be competitive and more outsiders could get into the steel business themselves.
Equally, the injunction in the plan for direct export to a largely untested African market is just daydreaming. The Chinese are already all over the rest of our continent. Does the Master Plan simply wish them away? Why do we imagine people already supplying the African market will melt away when we appear over the horizon?
This is not a reform of the local steel industry so much as a whipping of it into line to meet a political target (job creation) that can be sold as an ANC achievement. We will not know for years yet whether or not it works but people who fall outside the magic circle where you sign up to the plan will quickly find themselves on the back foot.
Many hundreds of employers already are. They are not part of the process but are forced to take the results of central pay bargaining whether they can afford it or not. If they opt out, life gets tough. You pay import duties but you’re not qualified for rebates if you’re not paying the central wage.
The danger of following the old colonial and apartheid industrial models is that they succeeded not because they were visionary but because they stood on the shoulders of dirt cheap black labour to keep the cost of everything low. That no longer applies and resorting to the same solutions in a time where South African labour is simply no longer competitive in dollar terms is an industrial conceit we may yet live to regret.
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