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It didn’t make for pretty reading but one of the first steps to addressing a problem is to be clear about the problem itself. And eight months on from the budget speech, Eskom and the public sector wage bill are at the heart of South Africa’s problems. Alec Hogg was in lock-up for most of the day, and unpacks this and more that was taken out of Finance Minister Tito Mboweni’s Medium Term Budget Policy Statement. And after his short presentation to share what he’d picked up, the fun started with Hogg fielding questions on a wide range of topics relating to the country’s fiscus (and some that were not so closely related…)
Welcome to today’s webinar. I’m coming to you from Cape Town. As you can hear, I’ve been having a couple of issues with a dreaded lurgy and we’re hoping that we can keep it out of the picture today as I can take you through everything that happened at the Mini Budget. In essence, it was one of those days where I could hardly believe my eyes, to begin with. I got into the lockup and the way that Treasury works is they invite you into Parliament very early in the morning. With the Main Budget, it’s 6:00. With this Mini Budget, because there’s less to go around, you need to get there about 7:00 and you then get given all your documentation. They take your cellphone away so you can’t contact anybody and just as well today because as you might have noticed, the Rand did not react well to what happened in the Mini Budget today.
So, they take all your equipment away, give you all the information and then you spend the next three or four hours reading it. Then, there is a press conference at which the Finance Minister and his team give their insights into or answer questions primarily, but give you a little bit of an overview on what they’re seeing – the budget presentation – and at 2:00 when the Finance Minister starts talking, we at Biznews are able (as are all the publications) to then publish the details, so that’s kind of the way the thing works. This Medium-Term Budget presentation speech was started in 1997 when Trevor Manuel had the bright idea – it was still the Mandela administration, would you believe, – had the bright idea that we needed to almost like have almost interim results from the government, as you have with listed companies when they come out at the end of the year.
That would be like the Main Budget and then halfway through the year you would have the MTBPS. We used to call it in the media the Mini Budget and we were chided for that again today. I got an email from somebody earlier in the week who said to me please don’t misrepresent it. So, we won’t call it the Mini Budget. We’ll call it the MTBPS even though it is quite long. The whole idea is, it’s like an interim report and today if you were imagining that the company involved (South Africa Inc.) was in difficulties at its main presentation… In other words, in [unclear 0:02:44.5] when the budget came out… Sjoe, well, things have gotten a whole lot worse since then.
Let’s just go into exactly what the story is. As you can see that’s a picture of Tito today.
He was quite jovial actually or most of the time you can go and hear the press conference on Biznews. I recorded the whole thing and he really did make/crack a few jokes. He’s an extraordinary human being who is a free thinker, an independent-minded individual with enormous wealth of information. Remember, he was the Reserve Bank Governor of South Africa for an extended period where he rubbed shoulders with the likes of Alan Greenspan and others and he certainly has a very good grasp of economics and what makes the world go around. And, today he was explaining in pretty brutal detail what the situation is in South Africa.
Let’s just look back though. In February, this was the opening to the 2019 Budget Risk Renewal and Growth. Nice story.
The opening this time was Growth Sustainability and Renewal. So, risk has gone right out of it because we really aren’t in a position in South Africa to take on any risk anymore. There is a hope for growth and most definitely there is a requirement for renewal.
The main messages in the budget in February is to try and narrow the budget deficit which was projected at 4.5%. Remember that number from the previous year’s 4.3% of GDP. These are important; these are the numbers that you compare countries around the world with. The second thing was to support the Eskom rebound and an amount of R23bn a year for 10 years was voted to Eskom in the February budget as you will hear in a moment. That has proved to be not even vaguely near enough and then the idea was to try and get the private sector involved as well, but with Cyril Ramaphosa going internationally and to put foundations in place so the private sector could come to the party. That was the message in February, 8 months ago.
The message today is that economic growth which was expected to come in at 1.5% is actually only coming in at 0.5%. So, when you’re in the Treasury, what you do is you will calculate your revenue receipts based on your expectation for economic growth. The fact that Eskom has disrupted the economy so dramatically with the electricity supplies not coming in, in the way it should have has meant that economic growth was only one third of what was anticipated and of course that makes complete nonsense of all the economic predictions.
And, you can see that as well in the highlight I guess of the or the low light of the budget was that there is R52.5bn in revenue that was supposed to come in that hasn’t come in. Now, in the past the reduction or the shortfall in revenue was primarily due to really bad management at South African Revenue Services and we’ve seen all of that in the Nugent Commission but that’s now been fixed. They’ve got Pravin Gordhan’s former right-hand man Ed Kieswetter in the saddle at SARS. So, they’re going about sorting out SARS and their revenue collection capabilities. You must know there’s not going to be any corruption going on there as there was in the past. This time around though the revenue has fallen because the economy is under a whole lot of pressure.
The budget deficit is widening from the expected 4.5% and the hoped for, even lower number than that to 5.9%. So, what you’ve got if you can imagine, are crocodile jaws. On the one hand, you’ve got revenues that have been lower than anticipated because economic growth has been bad and that’s because of Eskom. On the other hand, you’ve got expenditure which is higher than had been budgeted and that’s because of Eskom as well – directly because of Eskom because Eskom needed emergency funding of R26bn and the increase in revenue for this financial year, for this fiscal year is going to come in at about R23bn.
So, they have managed to squeeze a bit of money from here and there from other parts of government but because of the need to bail out even more into Eskom that is a consequence of an even wider deficit that we’re having to deal with.
Finally, this is the number that quite a few of the news outlets are focussing on – the debt to GDP ratio which at the current trajectory is going to go above 70% in 2022. Now, if you get above 60% in your debt to GDP ratio, which is where South Africa is now, you are in very dangerous territory. In fact, many people will say for a developing country, you’re in a debt trap. 70%…well, you can just imagine, so these are the main messages Tito Mboweni gave us.
Stu, from your side, do you just want to tell us how we are going to handle the questions?
Excellent, thanks Alec. As usual, we do like to keep it conversational. So, just on the right-hand control panel there’s a little questions toolbar. If you click that drop-down menu, you can pop your questions in there and I will pass them onto Alec. Before I get there. We didn’t start off to test that everyone can hear and see us. I got a few high five’s already Alec, so that’s good. So, we are going through loud and clear and visually sound so that’s super. So yes, those listening please just put your questions on the control panel on the right-hand side and I’ll pass them on as we go. And please, keep them as simple as you think we need to, to sort of unpack any of these elements that Alec is putting out if we don’t fully understand. It’s all part of the learning experience, I think. Isn’t it?
Yes, I agree with you. There’s no such thing as a stupid question. There’s only a stupid person answering. Please, keep it simple. What was really good today was in the hour and a bit that Tito Mboweni handled his press conference, he really did keep it simple. He unpacked things for us so that it was even us guys in the media were able to pretty well understand what was going on in the country and I think I can pass on some of that if you have questions along those lines. Okay, let’s just get into the revenue. You can see that number, R52.5bn worse that is coming in the current budget but now where the real issue comes in here, is that, when you’re budgeting for a company or a state or an individual if you go backwards in one year.
It has a knock-on effect in the years ahead and you can see this impact here. The reduction in the revenue projections, in other words the money that’s going to come into the treasury this year, this fiscal year that goes to March 2020 is going to be just over R50bn. Which is a record by the way just in itself, but now, the base for the following year is lower. So, with the previous projections of an economic growth rate of about just over 1%. You can see the impact there is R84bn gone and then R114bn is gone as well. So, this is, it reminds me of the Asset Manager, Piet Viljoen who used to say; “The key thing about investing is just don’t lose money.” Because, when you lose money you get back onto a base that makes it really difficult from which to grow again.
Whereas in this instance, they are losing the projected revenue and as a consequence it really impacts you going into the future. And, that is a table that illustrates that. Then we have a look at the other side of the coin and that’s on the expenditure side. Now, I don’t want to go into too much detail here except to say to you that if you have a look at the first column there that gives you to the debt to GDP ratio. This is a very important figure and one that is used around the world. There’s kind of two measures, two ratio’s that you compare two countries against each other on. The one is the budget deficit as a percentage of GDP and as mentioned is now going up in South Africa’s instance because of the reduction in revenue and the overshooting and that will be sitting at nearly 6%.
You can see it there. Budget balance that R306bn number underneath that 5.9%. That takes us into the realm of Pakistan and Argentina. Not happy days. Then, underneath that the other big issue that we look at and, I want to remind you that before Jacob Zuma became President of South Africa. The countries debt to GDP ratio was 26%. It now is at 61% for this year. Which is as Tito Mboweni said in the press conference today. He said this is the thing that scares him and worries him the most. So, it’s almost like a chief executive or maybe not a chief executive but a financial director coming out and saying to investors and to people in the company. We’re in a hole, we need to do things differently. We can’t continue to do things as we have been doing them.
If we do continue on this trajectory we are going to be in deep poo and as you can see from here. When you go to the 2022 year, that debt to GDP ratio goes to 71%. Well, there’s just no way. If that happens, if that trajectory is not changed South Africa will be able to keep its investment rating and that has got all kinds of knock on effects as well. So, it’s already too high at 61%. What is TJ going to do about fixing it? What is the government going to do about fixing it? The one good thing is that there is the world this time which hasn’t been the case in the past. We’ll talk about that in a moment but here’s where the fiscus has been drained. You can see that there was, despite the R23bn that was voted in the last budget for Eskom.
So, Eskom was in trouble. The calculations were done and the view was that the tax payers would have to put in R230bn into Eskom to try and sort it out. Remember, it’s sitting on debt of quoted R441bn is the exact number but it’s quoted R450bn. These are just crazy numbers. R450bn in debt that Eskom is sitting on. Just to reduce its debt servicing it was decided in February that over the next 10 years Eskom would get R23bn worth of cash from us tax payers. So, every additional 1% of VAT. You can work it out that way. So, you would have paid 14% now you’re paying 15%. That 1% goes to Eskom. Then it transpired it wasn’t enough and Eskom actually,
The shareholder puts money into the, into Eskom as equity. Well then, it’s really a gift isn’t it? It’s never going to be repaid. One shareholder is just putting more money in. It’s not a loan account as you would do in a private company. So, he’s saying, after this from here onwards. Everything that is put into Eskom is a loan and Eskom will have to repay that sometime in the future. And the only reason why Eskom is getting this money. Is getting this loan is that it would have to listen to what government has told it and he says the board of Eskom and the management are going to have to meet certain hurdles before they can get the money in there and one of those is to split up this monopoly into three and that was something that Pravin Gordhan spoke about yesterday.
What I liked a lot about this. I mean, I hate this, is that there’s another 1% VAT effectively that we had to pay for Eskom over and above that we’re already paying them but one good thing here is that the pragmatism that is coming through is now really shining. First of all, if you don’t have electricity in your economy then you don’t have an economy. We are – we’ve got a sole supplier at the moment pretty much. We’ve got to just keep Eskom going. That’s the first thing. But, throughout the discussion in the speech and in the press conference today Mboweni was at pains to say that South Africans should not be beholden to a monopoly like this and that South Africans need to de-risk on electricity.
Although in many ways we are paying a higher price we are going to be getting structurally a far better supply situation into the future because on both the generation and the distribution the private sector is coming to the party. Anybody who wants to now generate electricity. If you want to put up a whole stack of solar powered or solar panels on your roof you are entitled to do it. Or, you will be entitled to do it and you can actually sell that into the grid. That is what’s going to happen and the private sector with new technology will be in a position will probably be in a position to undercut a lot of the Eskom costs. Very interesting to see how this is going to go.
We had a lengthy discussion yesterday by the Public Enterprises Minister, Pravin Gordhan where he explained that the Eskom generating parts are going to be broken up into three separate units. Where you will have a low-cost plant, middle cost plant and a high cost plant and they will then compete against each other. And suddenly, from a dogma if you like where competition was bad. We are not hearing everywhere that competition is good. And the more competition, the better. We’ve been through the fire. It’s been really hard but what is a good thing is that the penny has dropped. There’s no question again that, or no question in anybody’s mind within the Ramaphosa administration anyway that this country can only get out of the hole that it’s in by promoting competition.
That’s really good news. South African Airways got a R5.5bn bailout. The same with the Broadcasting Corporation, this also drives a lot of people crazy, R3.2bn that was bailed out there. Denel R1.8bn and SA Express R300m and as Tito made the point, he said how insane is this, South African Airways is funding. SAA has got a shareholding in SA Airlink and it also owns SA Express and it competes against each other. He suggested that SA Express should close down and he said which was quite interesting. Of course, this is a fellow who once before said we don’t need a National Airline. He has said that the process that happens with the closing down. With the proposed closing down of SA Express would then be able to be used for another airline.
He said he didn’t want to get into trouble with his boss Cyril Ramaphosa by mentioning the name of the airline but you don’t have to be, there’s not much of a stretch of the imagination to know who he is talking about there. The interesting part about that, he also said he’s delighted that South African Airways is now talking with potential shareholders and it will be removed in the near future as a liability from taxpayers and you can see why he feels that because R5.5bn was again and over vending for this financial year that we are now in. It made his numbers look really bad. So, just looking at this. The primary balance of the budget is the, essentially what happens in South Africa’s budget the way they look at it is if they have a look at the amount of money that comes in from taxes and against that they will allocate to the various parts of the state.
So, you take the tax money in allocation to the state and the whole idea that’s called the primary balance. The whole idea is to run that at a zero situation. If possible, even at a surplus but it hasn’t been possible for more than 10 years. The, over and above that there is the interest payment. So, they strip the interest payment out for their own calculations and say look, the first point is to get to this primary balance. You can see on this chart the non interest spending as they call it is the red line. That was below 2006/2007 and in 2008 in fact there was a surplus even with interest spending in those two years. As you can see the black line is above the red line but recently that has been rising.
Now Tito tells us that he is trying to take R50bn a year out of expenditure for the next three years so that he can at that point get the red line to come together with the black line but he still has to take that out. He said at the current situation at the current, the way it’s currently going is about 1% of GDP which is a primary budget deficit, not good. So, anyway, that’s – I don’t want to get into too much complicated details but it just gives you an understanding of where we are and where the finance minister is trying to take us. This is a pretty complex graph or table but, I only put it in there to show you. If you have a look at 2019/2020. In the budget that was presented in February there was an estimate of debt to GDP ratio of 56.2%.
I think if you look at that down the bottom 56.2% you can see 2019/2020. That’s the fiscal year we are in now. Now, the MTBPS today that has gone up because of the further support to Eskom to 60.8% call it 61%. If you strip out Eskom it’s still 59.8%. So, this is bad news and there is no surprise why the rand reacted very negatively once these figures were released. Like I said before, it’s like coming out with a company giving you interim results that really disappoint. So, what is the other big bug bear? Eskom you can see. That has been a huge problem for the economy. Public Servants are another bug bear and today there was a lot of detail provided about the way that public servants are overpaid relative to the private sector.
The public sector average salary is significantly higher today than the average salary in the private sector which is really not a healthy situation because, if you consider that in the public sector you are there to serve whereas as a private sector you are there to generate the economy and the wealth and pay the taxes. So, you really are having things upside down. The other problem with all of this is that there hasn’t been that big an increase in the number of people working for the public sector. What has happened is that they just get paid better and better. They have been growing their pound of the cake of the pie in real terms by 2.2% a year. So, they are getting on average 2.2% a year, the public servants more than the inflation rate whereas the private sector it’s the other way around.
So, and what makes it worse is the economy is struggling. So, just think of it in another way of looking at it. If you have a company that is performing poorly and the wages in the other company even though it is performing poorly the people who work for that company are getting bonuses and salary increases and so on. And that’s what’s happening with the South African state. It’s almost living in lala land. Those who are lucky enough to be in the public service because they haven’t really grown the numbers that much. The numbers peaked in 2012 and have been reducing slightly…
Hi, I think we’ve lost Alec again. I’m just waiting for his internet to come back. Sorry about that.
… people who are going through there.
Hi Alec, can you hear me?
I can Stu; did you say the sound is gone?
Yes, you’re back now it just went for a seconds just now. Just not sure how to alert you to it. That’s fine.
Stu, do you have any questions?
Yes Alec, there’s just one. It’s a comment from Evelyn. She just wants to know. Don’t we have an asset forfeiture law that we can somehow retrieve some of the misgivings or you know, takings by people like Zuma etcetera. I know they were in the Gupta compound the other day but I’m not sure it’s enough to help with the Eskom deficit.
Evelyn, you are right. And, this is something that is occupying minds a lot more than it has in the past. The whole corruption. If you do the work that we do you have to sit through quite long presentations including the one yesterday where Pravin Gordhan was talking about Eskom and a big part of his presentation was the state capture cost to Eskom. We shouldn’t forget that not too long ago the Chief Operating Officer of Eskom was a, of the Gupta’s rather was a guy called Mark Pamensky was on the Eskom Board. So, there he was Mr. Gupta, Chief Operating Officer serving on the Eskom Board and obviously, making sure that his clients, his customers, his bosses were well looked after. So, this whole asset forfeiture unit.
And it’s really nice to know that Willie Hofmeyr despite all the pressure that was put against him he hung in there and he’s still there. So, there’s still some very good people in the law enforcement agency who are still around. You can be sure they are going to do their utmost to claw back money that has been lost. But really, when, as Stewart says when it comes to Eskom. A lot of that money is spent. It’s been used really badly. They’ve built Kusile and Medupi in a very poor manner. It might be a blessing in disguise in 10 years time when we look back on it because, had they done it properly you wouldn’t have had the situation we’re seeing now where Eskom is actually being dragged into the 21st Century and into a more competitive environment and there could very well be a time in the future where we see that the market forces force the price of electricity down and that was never going to happen the way Eskom was going.
But, the other thing that Mboweni was telling us about was that in the state sector there are just too many public servants earning too much money. And, this was the point that he used here. He actually ran a produced or treasury produced 6-page document within the budget information today to show how well the public servants are living. That’s the first of those tables. Here’s another one which shows you. Remember this is put together in the documentation by treasury the grey line shows you the percentage change that the state has enjoyed and since 2015/2016 it’s been much better to be in the public sector than to be in the private sector which makes no sense whatsoever. Given to where the productivity of the country comes from and then, there’s also this table which really does highlight everything.
When you strip out inflation and go back 12 years the public servants who get about 1/3 of all the tax money that we pay have taken out R518bn a year as opposed to R54bn okay. That’s fine. But, the real problem there, you can see there’s an inflation adjustment of 158 but R159bn of that is through increases in their packages. So, increase in personnel not that much R46bn but R159bn. What is that telling us? It’s telling us the public servants are really negotiating well when it comes to wage increases and I suppose we should think, or we shouldn’t be surprised by that given that a lot of them are unionised and the public service unions do have quite a bit sway in government. But, once again, we’ve got a guy who’s now Finance Minister, who’s unpacking this stuff, who’s showing it to the public.
Letting us understand exactly what the reality is of the situation we’re living in. This means when you have to give money to Eskom and the public servants that where you want the money to be spent on capital expenditure or investment it isn’t. If you look there during the early 0’s from 2000 – 2008 there was a big increase. Good improvement in fixed investment in South Africa. There was a couple of good years 2011 and 2013 but as you can see subsequent to that in fact, it’s been going backwards. So, that graph tells a very big story. We are misallocating resources. In a business, your most important thing in a business is the allocation of resources. In a state, if you want a state to grow and prosper you also need to allocate your resources properly.
This is telling us that the resources have been very poorly allocated for the last decade. But we know where the attention was in the last decade. It certainly wasn’t on growing the economy. Here’s the consequence of it as well. How South Africa is underperforming against its peers. You can see there in 2007. Really, we aren’t talking about the U.K. and the U.S. here and this is Thailand, Mauritius, Botswana, Costa Rica, Brazil, and Algeria. So, in a bit of a peer group and the GDP per Capita of South Africa has gone down since 2007 and the peer group has just run away from us. So, these are very powerful images. The optics are extremely strong for people in parliament and anybody who is prepared to look at this and this is what Mboweni was trying to say to us today. Trying to explain to us today that the status quo cannot continue because at some point in time you’re going to just fall right off the graph and then you’ll be comparing your per capita incomes with the likes of Pakistan, Mozambique, Uganda et cetera and that’s not where anybody wants to go.
So, time to fix it, time to shake the Baobab tree as he said in his speech today and if you look at the long term GDP’s lovely numbers the 60’s at 5.5%, 70’s 3.3%, 80’s 2.2%, 90’s 1.4%, we had a nice little run in the 0’s 3.6% and so far between 2010 we are down to 1.8%. So, the 90’s were pretty poor. The current decade is almost as bad. So, that really puts in a nutshell why South Africa is not doing as well as it should.
The public finances are going to have a big impact on Moody’s but the thought is that Moody’s and I like this table because it tells you that both SMP and Fitch have not just taken South African debt into junk but they’ve taken it notches into junk and they did so first getting in their junk in April 2017. Moody’s we’re still hanging in there and it’s very important that this investment grade is retained. There is quite a lot of discussion about this, Mboweni and his team and that included the Director General of Finance, the Deputy Finance Minister, the Reserve Bank Governor and the head of SARS. They were asked how is it that South Africa can avoid to be downgraded by Moody’s on Friday.
The consensus was that Moody’s, and Mboweni reminded us that Moody’s will take a view on whether or not the debt that’s being incurred will be paid. Whether the country that’s incurring the debt is first of all willing, which South Africa is. We’ve had the debt stand until the 80’s and if ever the country was going to renege on its debt that would have been it. So, it is willing and able which is a question mark which is now a much bigger question to repay that debt. It’s like if you go the bank and you borrow money from the bank. They will first of all, if they believe you are not willing to repay it you’re not going to get the money. But, it’s more important for them to find out if you are able to repay it.
And that’s what the Moody’s is looking at. At the moment, despite the fact that the debt to GDP ratio of this country is rising there is still the view that the country can repay debt. But it’s a close thing. It’s a close thing and it’s quite a significant impact if you listen again to that press conference. There’s a very nice unpacking of the whole impact of a downgrade by Lesetja Kganyago, the Reserve Bank Governor. So, that if you are interested in that kind of stuff. He really did do a very good job on it and it could be worse. I just had to finish off on a slide that was and does show you that yes, it is tough but really it could be worse. And, what I’ve done here is track since the elective conference of the ANC, South African Rand with the Turkish Lira.
And the reason for this is the South African Rand and the Turkish Lira used to be very closely correlated and the reason for that was Jacob Zuma and President Erdoğan of Turkey are very similar economically ignorant autocrats who believed that they knew what other people didn’t. And, in their arrogance of ignorance they have caused significant damage to the country. As you can see, since Ramaphosa took over the rand has hugely outperformed the Turkish Lira and that tells you that despite our difficulties that have been now well illustrated in this MTBPS today there is still, there are still lots of countries that are doing a whole lot worse than South African and the good thing about this is that there is now a recognition and an understanding of the issues that South Africa faces and I guess that’s where the turnaround starts.
You have to hit the rock bottom first and you have to know that it’s the rock bottom and that very clearly going through everything that I read through today and listened through today here in Cape Town at Parliament gave me the impression that certainly, the turnaround might not be here yet. We might not be seeing much of it but I get what Mboweni says. The winter is over and it’s not going to get any worse but we now have to start looking forward to spring but it’s going to be hard work to get those green shoots growing. Stu?
Thanks Alec, I suppose like they say whenever there is change you have got to admit the mistakes before you can actually fix them and I think that’s what we’ve seen in the last few months coming through which is quite nice.
Can you imagine and I think this is what this graph tells us? Can you imagine where we would have been if the Zuma dynasty had continued. If you look at this graph, we’ve outperformed the Turkish Lira by almost 50%. If you take where the rand would be, what’s it around 15 today it would be at R22.50 against the U.S. Dollar rather than R15 just by following the same way the Turks have done. But, worse than that, the Turks are sitting on much higher interest rates than South Africa has and they have had to jack up those interest rates just to protect their currency otherwise they would be even worse off. To do things right is not popular. It also takes time.
When you are building a business, you need to be doing the little things everyday as Warren Buffett tells us to expand that mode. You pick up the phone when it rings near you. You treat your customers and staff with respect. Those are the things that give your business an advantage but you don’t see it on day one. You see that over a period of time. It’s a similar thing with the country. This country South Africa has been through the most terrible abuse over the last 10 years. We’ve chronicled it. We’ve spoken about it. We’ve given the indications of it but it doesn’t help anybody if we now wallow in that awful period and blame everything on it. What Mboweni is saying is, here is where we are. Here is the line in the sand. We are going in this direction.
We need to fix it. The way we fix it is by doing the tough things. Taking the hard steps and he said today. If that means they start branding me as a mere capitalist I don’t care. As long as we can do the right thing. I can tell you; I feel this more strongly today than I ever have for South Africa that there is a pragmatism that is now being woven into the fabric of the political readers of this country which never existed before. In the past it was more of a revolutionary freedom fighter liberation type culture where ideology ruled or pragmatism doing the right thing was not going to be embraced. Simply because it was the policy of [unclear 00.39.35.4] or someone else whereas today that is changing and changing dramatically.
We saw that from Gordhan when he spoke yesterday where he spoke about Eskom. We saw the same thing from Tito Mboweni today. He said we had spoken to the Director General of Finance and they’ve agreed on certain state assets that will be sold i.e. privatisation which was an anathema in the past. The whole idea of breaking up Eskom into three units where two of them are going to compete against the private sector was also never going to happen in the past. Tito said today why shouldn’t the private sector own ports. We’ve been talking about the expansion of the Durban harbour for decades and we never get around to doing anything about it. If the private sector owned it maybe something would have happened. Maybe by now they would have expanded.
There’s a very different way of thinking. I remember once hearing after the global financial crisis of 2008, Maria Ramos in fact said we should never let a good crisis go to waste. South Africa it seems is not letting the crisis of Eskom go to waste. It’s starting to re-examine everything and this independent-minded Finance Minister is in the vanguard.
I know it was flagged with Pravin yesterday and Tito today on the unions. Leonard just wants to know. Do you think the unions will buy into this if it looks like they might get a bad deal?
Well, the unions have had an amazing run if you consider the public servants and the way the public servants are earning. I think the number is R70,000 a year more than the average in the private sector. Because the unions have been so strong. So, every year the unions can negotiate a little bit more. He actually, Tito actually went and broke with protocol and he named Faith Muthambi as part of the reason for the problem. He said she signed a deal with trade unions which was outside her mandate and basically, he’s saying that she needs to be brought to account for that. You’ve never seen that before in the ANC. The unions have had it their own way for a long time in South Africa.
They now have one of their own number who’s running the country and if anybody is going to get them so that they can understand the need to adjust things then it surely has to be Cyril Ramaphosa who himself is one of the hero’s in the trade union movement. Time and again Pravin Gordhan said it and Mboweni said it many times today that South Africa is at a juncture where it cannot continue with what happened in the past but everybody needs to sit around the table and make the sacrifices to turn this around and the unions are going to be a very big part of that. So, are the unions going to go on strike and fight against the changes that are being proposed.
In the past they can say their members have been underpaid but it’s been 25 years now of democracy and also, these numbers that were published today show that the unions particularly in the state sector have been too successful and as a consequence of that the – Mboweni spoke about a lot of optics and there’s a criticism but I think the optics are so important. Everybody will in this state in future will in future fly economy class. They won’t fly in business class. He says that in the past what used to happen is that the ministers and their support staff. If the minister wanted to fly first class the support staff would fly first class as well. He said now in a local flight and domestic flight you will not find a state employee flying in business class again.
He’s also put a cap on what cars can be bought. Because it’s part of the terms of employment. There have been lots of negotiations on this but he says he’s going to put a cap on R700,000 for vehicle including VAT. That’s a huge amount of money for a motor vehicle but if you are a public servant who is used to spending over R1m if you’re a mayor or whatever to show how important you are. Then this is quite a big issue. If you take the subsistence and travel allowances from international trips. So, when public servants in the past they had a huge incentive to go to conferences abroad because apart from the fact that it was quite a nice journey they also were paid handsomely in subsistence and travel allowances.
Those allowances have gone. So, any public servant who now wants to think of going abroad is going to have to pay out of their own pocket. So, he also mentioned cell phones. He says that the public sector pays R5bn on the cell phones of public servants. He says that’s ridiculous. If a public servant is going to use a cellphone for state business then claim back what it is you’re using it for but don’t just issue cell phones willy-nilly to people and spending R5bn of taxpayers’ money. So, there might be optics and it might be something that people will criticize and say yes, you’re playing at the edges but it’s sending through this continuous message.
This message that Ramaphosa had from the day that he took office. The #ThumaMina story. What is it that I can do to help fix this country? And that was reaffirmed by him again today.
There’s one from Theo, he just wants to know what the contribution of corruption is to the high debt to the GDP ratio is? I know Cyril mentioned something around a trillion that was lost but I don’t know how you work that out.
Yes, Cyril mentioned in London at the Financial Times Conference he was asked how much by the Editor of the Financial Times whether the figure of R500bn was accurate and the losses to corruption. He said no, it’s more than that. In fact, he says he thinks it’s R1trn and Hermione Cronje who’s the investigator with the National Prosecuting Authority put the number at R1.5trn. Interestingly enough the National Prosecuting Authority is one of only two units that is being given more money in this MTBPS. They’ve been given an extra R1.2bn so you can see that they need the money to prosecute the corrupt. The other organization that’s getting more money, R1bn over the next two years is South African Revenue Services.
So, the two areas where the Zuptoids trashed the place quite badly are getting attention and are going to be supported. But you know R1trn is a lot of money. A trillion would certainly have made that debt considerably lower than the number we are now having to deal with. South Africa’s debt went over R3trn. If you want to break it down, the loss to the fiscus of R1trn in debt in corruption is the equivalent of a third of [poor audio].
Are you still there?
Yes, I’m here.
Cool. Guy has an interesting point. He says, do you think locally assembled vehicles would be prioritised in the R700,000 cap on cars?
I think you’re right Guy. There is no doubt that the whole motor vehicle sector is coming in for more support. Mboweni did mention today. He spoke about it almost in passing that a new factory that is being built by I think it’s Ford near Silverton. He’s such an interesting guy. He’s got all this information at his finger tips and he’d talk about one thing and then he would use it as an example. He said that they signed a deal. They’ve agreed a deal with a major American Motor Manufacturer to expand significantly at their plant in Silverton and he said they did this last week. So, clearly what happens in a case like this is that the motor manufacturers will go to government and see whether or not they can get some incentives or guarantee the existing will continue.
I’m not sure if the other American motor manufacturers, the one that jumps to my mind is big in South Africa is Ford and we all know how well the Ranger has been doing. So, yes locally assembled cars almost certainly are going to get some kind of a push in this whole focus on reducing the swankiness of the vehicles the public servants drive.
Thuli just wants to know if there was any mention on the special economic zones. Where are they or will they only be addressed again in February.
Yes, there was mention of that. He had mentioned that there had been a couple that were up and running. There is one near Rustenburg. There is another one in Saldanha. Those are the two he mentioned specifically. So, they’re on their way. They are going and he also mentioned that there had been a big investment into industrial parks and I think a number was more than a dozen anyway of these industrial parks that have been revamped and made more habitable for businesses. So, that kind of support is coming through. I’m glad you asked that question, Thuli.
Another one from Guy. He wants to know. Is scaling medium enterprises not a way to create sustainable employment and help jumpstart economic growth?
I don’t think anybody would doubt that. That the SME’s or smaller medium enterprises are the drivers of any economy. On the other hand, though you need the scale. You need the big operations as well particularly when you’re far away from major markets in other parts of the world. It does give you the advantage. The geographical difference does give you an advantage but sure. There’s a lot of support that’s going on for small and medium enterprises. At the moment those are – that’s kind of apple pie. What motherhood and apple pie? At the moment there’s Eskom. Eskom is a problem. Everything else shrinks into insignificance makes to Eskom and the overpaying of the public servants. Those are the two issues that were highlighted as very sore thumbs in the MTBPS today.
The whole idea of the MTBPS is that it gets the boat going ahead of the budget. That’s the whole purpose of this. It isn’t to raise new taxes or talk about tax policy. It’s to get those who make the decisions ahead of the actual February budget. So, you start talking about it and to understand better. And in that context, these are the two real big issues that the country needs to grasp and deal with and sort out.
There are no more questions but I suppose the one thing on the public sectors he mentioned was how few of them had taken voluntary retirement. So, it shows what a good wicket they all seem to be on.
Isn’t that a really good point. I think there were less than 4,000. I think the number the Director General of Finance gave us was 3,750. But he did said it hadn’t been terribly well marketed. They hadn’t really explained to the people in the public sector what the benefits were of the – what they put on the table. You might remember in February Mboweni highlighted this as something that’s going to save the country R12bn a year in the public sector wage. It’s come nowhere near that as they’ve admitted because not too many people had taken it but on the other hand they have not given up. They will be marketing the idea a lot more aggressively in the months ahead. We might get a pleasant surprise come February.
Sorry, just one question has come through from Louis. will government be trimming the workforce or is the salary freeze in order to curb the government spending. Looking at the budget what things could be introduced to raise revenues? I think that’s a good one to finish with Alec.
Yes, that’s very good. The freeze on salaries at the moment is only at a very high level. It’s not in the public sector generally. It’s cabinet members, MEC’s, premiers. Almost, and they talk about it for the foreseeable future so who knows how long this could go on for? Also, the intention is to try and reduce that. I think the message that’s being sent here by the Department of or the Minister of Finance and the Treasury is that the old days when the public sector was a guarantee of getting inflation plus getting increases and having a pretty good easy life with …
I think we’ve lost Alec again. I think it’s probably a good place to end unless he comes back in but what we’ll do is we will publish the full webinar on the website as soon as it’s ready and we’ll get one of the transcribers to transcribe the actual webinar for the website as well. Thanks for joining us. Sorry, he’s back. Alec we lost you for about 20 second there.
Okay, well it is Cape Town you know. I don’t know how good the Internet is, it is something they’re trying to send the message out that the lower risk that you have in the public sector comes at a price and the price is that you are not going to get the same kind of increases that you get in the private sector. Where it was supposedly more productive. And, that’s going to get through no doubt. It’s started and we’re on that journey now and it is a journey that is very different to what happened in the past. But, thanks very much and thanks for persevering with my pretty difficult voice. What happened was I was in London last week, the whole of last week where it was blessed cold. Came back home to Johannesburg where as you know, it was sweltering and in Cape Town it was freezing. When I arrived here (without a jersey) and of course, picked up something as a consequence. So, thanks for persevering with me and I’m very pleased that so many people joined us tonight to pick up on the MTBPS, what we used to call the Mini Budget and not allowed to call it that anymore.
Thanks for everything Alec, as always. As mentioned, we will put the webinar on the website as soon as we get it up and then we’ll also get it transcribed for listeners and they can pick it up from there.
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.