Dear ANC: ‘Fix 75% business failure rate: kill BEE, give title deeds’ – employers

As the SA economy was already in a recessive slump before Covid-19, the Covid-19 crisis creates an opportunity to fix an economic strategy that has failed to generate the growth necessary to create a better life for more than a minority. This idea that a good crisis should not be wasted has been addressed by economist and entrepreneur Dr Lawrence McCrystal and legal expert Advocate Hein van der Walt of the Confederation of Employers of South Africa (Cofesa) in detailed and controversial proposals. This is their third proposal which follows steps detailed in letters in April and June this year. This proposal essentially states that BEE brought about the opposite effect of its purpose. The good intentions – being the removal of ‘all the obstacles to the development of black entrepreneurial capacity’ and to ‘unleash the full potential of all South Africans to contribute to wealth creation’ – did not come to pass. While this is a brave assertion to make, it is comprehensively substantiated. – Nadya Swart

SA ‘Reconstruction, growth and transformation: Building a new, inclusive economy’ discussion document

Dear Mr Godongwana,

Thank you for inviting us to contribute to your discussion document ‘Covid-19 Economic Reform’ to ‘highlight the economic interventions necessary for job creation, growth and investment in the South African economy amid the coronavirus (Covid-19) pandemic’.

We support the concept of a ‘A New Inclusive Economy’ and foresee that synergy will generate unprecedented growth with millions of jobs and ensure food security for our 20m hungry people and 120m hungry people on our continent. As employers’ confederation we are committed to the development of human capital, entrepreneurship, fairness, productivity and sustainable jobs.

Inclusive economy

The theme of your discussion document resonates with the call made in parliament by President Ramaphosa for real proposals and solutions for inclusiveness when he was asked whether it is not time to rid the country of policies such as BEE and affirmative action.

Inclusiveness also resonates with the Freedom Charter June 25 1955:

‘The rights of the people shall be the same, regardless of race, colour or sex’

‘All people shall have equal rights to trade where they choose, to manufacture and to enter all trades, crafts and professions’.

The MD of the IMF and Article IV report on SA calls for us to align with international norms of inclusiveness

“Fiscal measures must continue to build the bridge over the financial support for workers and SMMEs”, the Managing Director of the International Monetary Fund Kristalina Georgieva recently said, emphasising the need for debt sustainability, financial lifelines and improved conditions for private sector-led growth. Inclusiveness is also the key to qualify for much needed IMF loans.

The IMF’s Article IV report on SA, published in January 2020 informs that SA would be required to implement major microeconomic reforms, especially for state-owned enterprises (SOEs) as well as product and labour markets and is called Building a bridge with improved conditions for private sector-led growth –

IMF loans: Significance as a credible internationally investment destination

The amounts we intend borrowing from the IMF may be relatively small, but qualifying for IMF loans will signify our international status as a credible investment destination for secure investments, which we seriously need at this time .

Treasury’s scenarios showed that more than 7 million jobs could be shed (in addition to the present 10m unemployed?) as a result of the virus and lockdown that has hugely reduced economic activity. Manufacturing, construction, trade, catering and accommodation, as well as financial and business services will be the worst-affected sectors.

Picking the ‘low hanging fruit’ will be at zero cost to Government

The World Economic Freedom Index of 2019, compiled by more than 60 world renown economists, some of whom are Nobel Prize laureates, found that deregulation of businesses in general, and specifically small and medium enterprises will broaden the tax base, generate tax income and lighten government’s burden to provide welfare grants.  

Picking the ‘low hanging fruit’ will be at zero cost to Government and, we calculate, could generate, over time, between 22m and 30m jobs in SA plus more than 50m jobs on the African continent, and regain our lost position in relation to comparable economies.

South Korea had a lower per capita GDP than SA’s in 1960. Today their per capita GDP is 32 times higher than ours.

• South Africa’s per capita GDP was a third larger than Singapore’s in 1960. Singapore’s is now seven times higher than that of South Africa.
• Botswana whose growth has outstripped even that of the Asian ‘tigers’.

South Korea and China looked insignificant before embarking on major reforms. The Covid-19 crisis creates an opportunity to fix an economic strategy that has failed to generate the growth necessary to create a better life for more than a minority. We welcome your efforts.

Reforms needed for inclusiveness

Proposal 1

Decline of SMMEs and corporates  

• Registered companies declined from 3,2 million to the present 2 million. (From 2015 the number of companies registered at SARS declined from 3,2 million to the present 2 million)
• SMEs have been under particular strain over the last 10 years 

– Financial and business services sector: 83,000 fewer companies (37% decline). (From 222,532 in 2007 to 139,664 in 2016 )

• Retail: 44 972 fewer companies (57% decline)
• Agencies: 11 799 fewer companies (20% decline)
• Wholesale trade:  6 310 fewer companies (28% decline)
• Transport and storage: 3 378 (15% decline)

Start-ups declined from 250,000 (2001) to 58,000 (2011) and have been declining ever since.

When we had 5, 579,767 small businesses in 2011, they employed an estimated 12 million people countrywide (Source: JTB Consulting). This has declined substantially since then, primarily because of the Government’s laws and expected future regulations of Minister Nxesi will make it even worse.

SMMEs are failing at a rate of 75%, the highest failure rate in the world

A study by SEDA, a subsidiary of the DTI, has reported a failure rate of 75% for SMMEs (according to Dr Rob Davies), with five out of seven new small businesses started in SA, failing within the first year. Therefore, and contrary to popular belief, SMEs in SA are not better creators of sustainable jobs than large companies, which they were SA and are in numerous other developing countries. The demise of so many smaller firms is not a good outcome, since it contributes not only to concentration in large corporations, but is depriving SA of potentially the fastest way to stimulate economic growth and employment. What Minister Nxesi is aiming to do is diametrically the opposite of what he, as the Minister of Employment, should be doing.

Despite the economic ‘boom’ experienced in the country between 2004 and 2006, the growth of small businesses has stagnated since 2003. Our remaining SMME’s not only need protection, but we need to see them rapidly growing in numbers.

Loss of entrepreneurs – Diaspora/brain drain More than 400,000 high income professionals plus their families have emigrated since 1994 and millions of remaining individuals are utilising the easing of foreign exchange controls to let their money emigrate. (Thank you for calling for their return). About 3,000 super-rich (those with wealth of $1 million or R15m or more) “migrated” from South Africa over the past 10 years, Andrew Amoils, head of research at New World Wealth, told Fin24 in April 2019. The monthly loss in tax is estimated to be between R10bn and R20bn.

Statutory protection for an elitist few  

An analysis by a leading economist, Mr Mike Schussler, of 2019 stats of Statistics SA found that BBBEE and affirmative action benefitted an elitist group, a maximum of between 30 000 possibly only as few as 10 000 people to the detriment of millions of under- and unemployed people. Moreover it distorts the economy (Beeld 18 November 2019 page 12).

It is notable that before the imposition of affirmative action and black empowerment Eskom was internationally recognised as one of the five most efficient power producers in the world. Now many large corporations have relocated to elsewhere in the world, leaving skeleton offices behind, to get away from the burdens imposed by affirmative action which made them uncompetitive internationally and to retain their highly skilled expertise.

Professor William Gumede of Wits University wrote late last year: “The purpose of Black Economic Empowerment (BEE), said the ANC in 1994, is to remove ‘all the obstacles to the development of black entrepreneurial capacity’ and ‘unleash the full potential of all South Africans to contribute to wealth creation’. In practice, however, BEE has had precisely the opposite effects. Close to R1 trillion has been transferred in BEE share deals, said Professor William Gumede of Wits University late last year, but these deals have gone to ‘a handful of politically connected politicians, trade unionists, and public servants’.

The favoured few have done little to expand the economy. Instead, adds Professor Gumede, they have ‘crowded out genuine black entrepreneurs and killed the development of a mass entrepreneurial spirit in black society because all you need to secure a BEE deal…is the right political connections’. BEE preferential procurement in the public sector and state-owned enterprises (SOEs) has also been inordinately damaging. By abrogating normal procurement rules, it helped pave the way for the ‘Zupta’-linked ‘state capture’, estimated to have cost between R500bn and R1.5 trillion.

Proposal 1: Instead, constructively reinvent and modernise BEE, affirmative action and land reform concepts

Embrace modern effective HR practice of recruitment, selection, placement and management to take candidates to their full potential in career paths and as entrepreneurs with tailored  programmes for coaching, mentoring, role models, incubators, interns, communication and networking skills. The youth, including the previously disadvantaged unemployed graduates need to be reached.

Nurture and incubate talent to release the unlimited dynamics of our human resources

We submit that BEE, affirmative action and ‘land reform’ objectives, can be effectively realised by involving the private sector with the application of human resources management in contrast to costly and out-dated government initiatives. A study by SEDA, a subsidiary of the DTI, has reported a first year failure rate of  75% for small businesses and Mr Alec Hogg, editor of BizNews, reported in 2011 that the  average cost of one job created by the IDC amounts to R250,000.

The Freedom Charter declares ‘inclusivity’ as

‘The rights of the people shall be the same, regardless of race, colour or sex’

‘All people shall have equal rights to trade where they choose, to manufacture and to enter all trades, crafts and professions’ – The Freedom Charter June 25 1955

Black empowerment discriminates against non-black people, and restrains economic growth. Free from affirmative action, our human capital dynamics will be released.

Proposal 1 Conclusion – Let the sun set on black empowerment 

Proposal 2: Inclusive – include, involve and embrace the private sector. Like elsewhere in the world, outsource enterprise development and entrepreneurship programmes to the private sector:

Entrust empowerment programmes to chambers of commerce and  industry and associations – to BUSA, SAACI, AgriSa, ROCCI, Cape Chamber of Commerce and Industry, Cofesa etc who engage volunteers from the commercial and industrial sector as mentors, coaches who are positioned to replace failed and costly programmes of government directorates and agencies.

Cost of one job R250 000 – A study by SEDA, a subsidiary of the DTI, has reported a first year failure rate of 75% for small businesses while Mr Alec Hogg reported in 2011 the average cost of one job created by the IDC amounts to R250,000.

Commerce, trade and industry are best able to (re)formulate workable criteria for simplified funding, incentives and grants and help and sponsor entrepreneurs

Assess risks and opportunities, draw up bankable business plans, based on concepts such as seed capital, intellectual capital, sweat equity, agency agreements, joint ventures, partnerships, synergies, marketing share agreements, outsourcing sponsorships, networking opportunities, etc.

To formulate viable and sustainable ventures, synchronised with trade and industry.

Proposal 3: Inclusiveness in ownership – Land reform – Transfer of title deeds –

Fast tracking these title deed transfers will generate R5bn – R10bn in VAT income and potentially create 3m jobs in services and retail. With title deeds in hand, the new owners will access bank loans and bonds to upgrade, repair and extend their houses, buy white goods, cars, etc, thereby stimulate the economy. The Free Market Foundation has, from its own experience, ample evidence to support this contention.

Issuing title deeds will have a Marshall Plan upshot – ‘THE BENEFITS WOULD BE EVEN GREATER THAN THOSE SEEN IN POST-WAR EUROPE’- Cameron, of the JSE commented.

We propose that a new kind of practitioners be recruited from the ranks of the unemployed black graduates for internships from all academic disciplines, including law, engineering, environmental sciences, to form a new body of practitioners, to be trained by 4IR interactive internet programmes to fast track the transfer of title deeds with 4IR IT programmes, Fourth Industrial Revolution dashboards, interactive training, monitoring and management systems, leading the Fourth Industrial Revolution. (Our COFESA programme already empowers 650,000 residents and urban clients such as City of Johannesburg (monitoring performance of 3,000 digital youth enterprises providing services to 650,000 residents) as well as rural clients such as at Ivanplats Mine in Limpopo (monitoring performance of 45 enterprises providing services to 50,000 residents).

This will launch the unemployed graduates as practitioners, to prepare and transfer 800,000 – 2,08 million new title deeds at national, provincial and local governments level and ‘boost the economy’.

These practitioners will ease the skills shortage on Provincial and Municipality levels to meet a chain of compliance criteria, fast track the transfer of title deeds and unlock the impediments identified by the Constitutional Court ruling in 2010- Page 7 as reported in the ‘Investigation of Urban LandMark’.

Proposal 4: Youth awareness programmes – ground level inclusiveness

Cofesa has pioneered a number of projects such as orientating learners at 200 rural schools to become entrepreneurs. Afterwards, one of the girls for instance assembled a team of seamstresses to make and sell their school uniforms. She also retailed items such as shoes, socks and stationery; creating a thriving micro rural enterprise with great prospects.

Some pupils started vegetable gardens, food distribution, services etc. Our chairman, Dr Lawrence McCrystal, is part of the Africa Cooperative Action Trust. Over the last 40 years they have empowered thousands of rural people both in SA and elsewhere in Africa to start their own vegetable gardens and eventually to advance towards commercial farmers and entrepreneurs through their Sustainable Agriculture Entrepreneur Development Programme. He was the founder chairman of the KwaZulu Development Corporation.

From informal business to the formal

To take informal motor repair businesses from the streets and sidewalks to the formal sector, Cofesa established a MotorMall incubator in Newlands/Westbury. The project also gave hope, alleviated poverty, drug abuse and crime.

Commercial mentoring success stories

At agricultural conferences successful previously disadvantaged farmers credit fellow farmers, neighbours and cooperatives for their farming success, for their advice, assistance, mentorship, financial help, transfer of skills and introducing them to markets.

Communal farmers increased rural wool  production from R1,5m in 1997 to R383,6m (2019) with the help of commercial farmers

Due to this help the communal farmers generated an income and afford school fees.

‘Boer maak ‘n plan’ – KykNet and Landbouweekblad programmes:

These programmes and Landbouweekblad articles reported how fellow farmers assisted emergent farmers to become successful, viable and sustainable.

It will be seen, from the above proposals, that there is a huge pool of goodwill, experience, and skill available to be mobilised to get the economy growing rapidly

Proposal 5: Inclusive manufacturing

Dealing with the IMF report of 2005, Mr Trevor Manuel argued in favour of relaxing employment laws and warned against “the entrenchment of a  labour aristocracy and the further marginalisation of outsiders by giving legal protection for large corporations to monopolise markets and for unions to secure protected wages and benefits for an ‘elitist’ group, imposing a major burden on the economy”. The World Bank agreed, and the available evidence bears out that this is exactly what has happened. 

‘Bargaining councils’ increase wage bills by between 18% and 33%. Abolishing  bargaining councils will open the economy and enable the establishment of an estimated 200 000 SMME’s with 2m+ jobs.

For inclusiveness, halt the extensions by the Minister of Labour of Main Agreements to non-parties. Bargaining councils levies and regulations increase wage bills by between 18% and 33% opening our market to cheap imported goods causing local factories to close.

• Mr Peter Leon on IMF requirements: ‘Labour legislation needs to be revisited, particularly the extension of so-called bargaining council agreements that set wage and working conditions for all businesses in a sector, including those that are consulted on these agreements. Issues such as these are cited as reasons for SA’s low-growth trap, and the IMF will want its pound of flesh’.– Mr Peter Leon’s on  SA’s lost decade and how to fix it at a June Herbert Smith Freehills presentation; ‘How to start fixing things to secure SA’s future’.
  • Ms Margaret Thatcher abolished bargaining councils in the 1980’s to turn around the British economy and
  • Mr Jim Bolger of New Zealand, who abolished the nationwide agreements by monolithic union power blocks with ‘compulsory union membership that bred wasteful strikes and scandalous abuses’. In months Mr Bolger produced startling results, bringing down inflation from 15% to 1,3% and increasing the trade surplus by 500%.

Proposal 6: Inclusiveness in the protection of employers’ rights. They have the rights to law and order – Let the sun set on prolonged strikes that cripple the economy and scare away investors

Enforce Pendulum Arbitration as an alternative practical way of resolving labour disputes quickly and fairly. We need to ensure that legal strikes are both peaceful and of shorter in duration, without causing damage to the economy. Compulsory “Pendulum Arbitration’’, an internationally recognised mechanism, would ensure this ideal.

Proposal 7: Inclusiveness also in fair treatment of employers – Let the sun set on excessive fines imposed on employers

We could not find similar excessive fines in BRICS countries: 44 firms, some of them listed on the JSE, were criminally prosecuted in 2018 under the Employment Equity Act. The majority were fined R1,5m. Companies face a daunting task of reflecting the country’s demographic profile, calculated as 77% black employees by the Department of Labour: Fines from R1 500 000, with R1 800 000 for a previous contravention and R2 100 000 for further contraventions, or 10% of turnover.

Proposal 8: Inclusiveness also for independent contractors, agents, actors, writers, consultants, engineers etc

Let the sun set on laws that thwart employment creation; laws, inconsistent with international norms, laws that are engineered to permit unions to force affiliation of independent contractors, outsourced workers and temporary employees as members.

Scrap the presumption (Section 200A of the LRA) that a person (such as an independent contractor) is presumed to be an employee until proven otherwise. This presumption discourages outsourcing and enterprise development and economic growth. Encourage independent contractors, incubators, entrepreneurs and synergise with them. They are the macro employers of tomorrow. Cofesa’s empirical study on the productivity of ‘contractors’ in contrast with ‘employees’ found that contractors are between 50% and 300% more productive than ‘employees’ and are consequently paid accordingly. The ‘cottage industries’ of China, create valuable entry levels to the formal industries. We need to promote similar models.

Proposal 9: Inclusiveness also for interns, the unemployed, the untrained, unskilled, students, learners, persons who ‘shadow’, the disadvantaged

For inclusivity – Let the sun set on the general application of minimum wages

Minimum wages prevent new entrants to the work force and  should not apply to trainees, interns or small businesses, and as in Germany, should not apply for the first six months or perhaps one year for previously unemployed persons. Since December 2018, 34 000 domestic workers have lost their employment.

Proposal 10: Inclusiveness of protection for all against unfair competition

Extend the Competitions Act, No 89 of 1998 to also apply to collective bargaining agreements.

Proposal 11: Inclusiveness also for the benefit of the continent and regions

In Africa more than 120 million hungry and poor people depend on our leadership to improve their living standards.

Inclusiveness means fast tracking the implementation of the AfCFTA’s (the African Continental Free Trade Agreement), which not only provides access to a continent-wide market of 1.2 billion people worth $2.5 trillion, but also effectively places Africa as the world’s largest free trade zone by population.

Proposal 12: Water “highway” from the Nile river to the Western Cape

The AfCFTA’s now makes possible a water “highway” from the Nile river to the Western Cape which would promote economic development all along the way. The canals could also be navigable for trade, agriculture and tourism. These plans would generate great economic development for S.A. and other African countries as well as attract foreign investment.

Water development

The Water Commission back in 1970 concluded that SA will, in due time, need to bring water from surrounding countries to help SA. That is where the Lesotho Highlands Scheme started.

Water from the Kunene river to Gauteng 

The IDC in the 1960’s worked on a plan to bring water from the Kunene river to Gauteng and promote agricultural and related industrial development along the canal through Namibia and Botswana. We could join this, through Angola, to a canal to bring water and hydro power from the Congo river.

Bring surplus water in the Orange River to the Western Cape

We have a plan which would bring surplus water in the Orange River to the Western Cape.

Proposal 13: Inclusiveness for our spare capacity in construction, engineering and other expertise will benefit all

We have spare capacity in construction, engineering, manufacturing, transport, management, finance, technology, agriculture, nature conservation, tourism, training, etc and other resources that can be used for an ‘African Marshall Plan’ to change the face of the continent. Expertise can also be sourced from overstaffed human resource complements at some State Owned Entities.

Since the completion of the 2010 World Cup, the South African capital project environment has witnessed a steady decline in activity and productivity. With some of the larger construction projects ending, the immediate future for the industry is bleak. This has been complicated further by some prominent construction companies off-shoring their business or going into business rescue and even bankruptcy. The departure of these companies is already causing skills depletion, resulting in the long-term shortage of capacity to deliver on capital project investments.

Proposal 14: Deregulate, privatise and commercialise

Vision – Inclusiveness will enable us to generate over time, between 22m and 30m jobs in SA plus more than 50m jobs on the African continent, and regain our lost position in relation to the following countries

South Korea had a lower per capita GDP than SA’s in 1960. Today their per capita GDP is 32 times higher than our’s.

• South Africa’s per capita GDP was a third larger than Singapore’s in 1960. Singapore’s is now 7 times higher than that of South Africa.
• Botswana whose growth has outstripped even that of the Asian ‘tigers’.

South Korea and China looked insignificant before embarking on major reforms. The Covid-19 crisis creates an opportunity to fix an economic strategy that has failed to generate the growth necessary to create a better life for more than a minority.

Please find the following supportive detailed submissions to President Ramaphosa and Mr Tito Mboweni

Part 1

Budget June 2020

• Originate a new business friendly tax regime with cash grants to rescue businesses and downsized government departments for a ‘new economic dawn’

Part 2

• Renewed call to emulate the success of the automotive industry to counter Covid-19 impact which will cost the state far less and generate more employment per rand of investment than state-driven infrastructure investments which have been proposed.
• Time for an Economic Development Board and Advisory Council
• Independent Advisory Council focused on a growth strategy

We look forward to an inclusiveness and synergy, for there is huge willingness and good-will in the non-government sectors as game-changers for South Africa.

God bless the brave. Let us embrace inclusiveness and synergy.

Dr Lawrence McCrystal and Adv Hein van der Walt.