DUBLIN — Another big week in South African politics – Ramaphosa announced a minor Cabinet reshuffle and Pravin Gordhan raised some eyebrows with his state capture testimony. In this episode, Alec Hogg and I discuss the reasoning behind the reshuffle and some of the implications of Ramaphosa’s decisions, such as the choice to reduce the size of the cabinet. We also start to unpack Gordhan’s testimony and the reaction to it. We wrap up with a look at the latest developments in the ongoing Steinhoff saga. – Felicity Duncan
Hello, and welcome to this week’s episode of the Editor’s Desk. This is BizNews Radio. I’m Felicity Duncan and with me on the line, is Alec Hogg. Alec, another big week in South African Politics. We saw some major and very important developments. First, we saw a cabinet reshuffle by incumbent President Cyril Ramaphosa that many have described as a soft reshuffle. A lot of the former Zuptoid appointees remain in place and some have described this as concessionary. Some have said that this is problematic, that Ramaphosa needs to do more while others have said, “Wait and see. This is the first step in a major reshuffle that we can expect to see next year.” We also had a lot of fairly explosive testimony from Pravin Gordhan – Minister of Public Enterprises – at the State Capture Commission. A lot to digest there. Several days’ worth of testimony to digest so all in all, very big and very important week.
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Yes. When it comes to the changes in the cabinet, I’m in the third camp. It was well-telegraphed. We had a statement from the Presidency to say two ministers (well, the one who had resigned – Gigaba – and the one who had died – Molelwa) needed to be replaced. In essence, what we were anticipating was that there would be those two portfolios handed over to someone else. There were however, some people in the political environment and the media etc., who wanted to make drama out of it and they were then calling for this as a great opportunity to shift the cabinet around, which I think is naïve. If Ramaphosa were going to change his cabinet, he would have done it at a time that made sense to him. He wouldn’t have done it when he needed to because he had two open positions.
Whatever the pundits are believing of their own ‘oracle-type’ abilities, I think that they really just were banging their own drums rather than looking at the facts of the matter, which were two portfolios that people needed to be brought in. What I liked about the way that he handled it was that he signalled a very significant development and that was for the first time (that I can remember, anyway) the size of the cabinet has been reduced. Only fractionally…only slightly, but the ministries of Post and Telecommunications, and Communications were merged. Now, this is a big deal in politics because it means you’ve got less sweeties to give out to your friends. There’s one less cabinet post and Ramaphosa said this before, that he would like to contract the size of the cabinet to a much more manageable area and this was an opportunity for him to show that.
For some reason, this doesn’t seem to have registered with the pundits who have been looking at it. I think it’s a big development and I also think it waves a flag for the future. The second thing was the people that he appointed there. We have a young 41-yr old who’s been a Deputy Minister since she was 34, who has been put into the very important position of Communications/Post and Telecommunications so that is a signal of the way that Ramaphosa’s going into the future. He’s looking for the talent that exists within the cabinet (even if it’s in a Deputy Ministry) and clearly, he’ll also be looking for talent outside. He did shuffle a few of the others around but that’s not Mokonyane moving from the one portfolio to the other because her portfolio effectively, was cancelled.
I do think that if you look at what he was trying to achieve and what he had telegraphed that he was going to do, and then what he did: that’s the way to judge this thing and not by some assumption that we might have had. The second point that you raised thought about the big development: that’s the big one. I’m spending this weekend reading through the testimony that Pravin Gordhan gave in from the 19th, 20th, and 21st. Reading through the transcript of the whole thing…looking again at exactly where he’s coming from and it is fascinating. If there is a person in South Africa who doubts that there are really good people who are addressing the corruption and who are uncovering the rubbish that’s going on, just go to the website of the Zondo Commission and start reading through the testimony rather than relying on a second or third-hand report where again, the drama is stirred up.
Go and read exactly what Gordhan had to say and you’ve got to be very thankful that you have this 67-yr old man in government who’s continuing to fight the good fight and to point the fingers where they need to be.
You know, I think it’s interesting you mentioned the Telecommunications post and the appointment there, and I think the youthfulness of that Minister is very interesting and important. We’ve seen across Africa…we have a very young population in Africa, much younger than anywhere else in the world and South Africa is included in this and yet, the ruling classes are all elderly. We have so many older leaders and a lot of people have observed that there’s this kind of disconnect growing between the people in charge and the population, which is this young, vibrant, dynamic population. I think the decision to appoint this young Minister is actually very important and hopefully, signals that Ramaphosa is thinking about this and thinking about ‘how do we bring in the next generation’.
To me, he’s focused a lot on the youth…focused a lot on youth unemployment and that’s a good sign. That’s a sign of someone who’s thinking about the future and thinking about making sure that policy is relevant to young people and that they can feel engaged and included in the society. It really just points to something good for the future all-round. Pravin Gordhan’s testimony: it’s so interesting how much criticism and how much mud has been thrown at him over the last couple of weeks (people in the EFF, for example) and really, some horrifying things said and to me, that just shows you that people are worried about what Gordhan is saying and people are afraid.
Well, of course then they should be because if you are one of the crooks, your biggest and only opportunity is to cause a distraction and actually, Gordhan says that in his testimony. He says that when you’re in war… And remember, this is a guy who’s been in the struggle since the 1970’s. He’s been active. He was arrested three times. He was put into solitary confinement for a lengthy period. He’s been through the fire. He’s not a Johnny-come-lately who drinks Johnny Walker Black and shouts from the rooftops about things he doesn’t’ really understands. This is a man who really has been there, done, that, and has many of the t-shirts. He says that in war (and he was involved in the war) “In war, what you do is you create a distraction. You create a diversion on the one side so that you can attack the point that you’re really wanting to.”
That’s all we’re seeing here. The VBS scandal, which hit The Financial Times in London this week – interestingly enough – after the FT got hold of (or was shown) documents, which shows that leaders in the EFF and their families and the party, directly benefited from this scandalous operation that was going on at the old Venda Building Society where effectively, money was taken from municipalities and dispensed to politically-connected people. It’s there. It’s true. It’s reality. What do you do if you’re on the other side/wrong side of that information? Well, you’ve got to try as much as possible to distract the rest of the population from the truth but South Africans are a very conservative nation. They’re a very conservative people. They’re deeply Christian. I know this weekend…. Cyril Ramaphosa, for instance, is going to a prayer meeting which Patrice Motsepe (or the Motsepe Foundation is arranging at the FNB stadium in Soweto.
It’s a country with 80% of the population who are Christians. They’re a little bit like middle-America in many ways. They might hear all the noise but actually, they go back to real basics, real values, and the reality that that brings to a society is one we must never ever underestimate. The silent majority are not saying or not believing the rubbish that is being spewed by certain politicians who’ve been caught with their arms in the cookie jar (not just their fingers) and that is part of the development and part of the drama, and the play that we’ll see enacting over the next few months. If you’re in trouble, what do you do? You try and find a way to get out of trouble or you fess up. Now, if you’re Mr Big, there’s no way you can fess up, so I’m afraid you really just have the one option.
Talking about arms in the cookie jar, we’ve seen a major global CEO and a very prominent leader in the auto-manufacturing industry Carlos Ghosn. We’ve seen him caught with his arm in the cookie jar. He’s been arrested on charges of having concealed $44m in the compensation – having hidden that and failed to report that and the reaction from the company that he heads up (Nissan – he was the Chair there) has been very harsh. He’s been stripped of his Chairmanship and the really much-vaunted partnership between Nissan, Mitsubishi, and Renault in France has also started to show some signs of strain on the back of this arrest. So, it’s a really important arrest and something that highlights the fact that corruption is by no means limited to the Zuptoids in South Africa.
Very much so, and before we talk about this one, we mustn’t forget about 1MDB – the Malaysian company – which was created by the former Prime Minister (a sovereign wealth fund) and from which he and his pals took $2.7bn. Of $6.5bn that was raised by Goldman Sachs who got a 10% commission for raising the money, so it’s not just South Africa. Getting back to Carlos Ghosn (because this is a huge international story): in 1999, he was appointed at Nissan. He rescued the company. There were even cartoons about this entrepreneurial hero in Japan. He was an icon and at that stage, he quoted widely as saying, “A CEO should not stay for longer than five years.” Well, now, 20 years later, he’s still in the top job. He’s been fiddling the books. There’s no other way of putting it. He has been trying to engineer a merger with Renault and on the board of directors at Nissan are people who really just don’t want this to happen.
Now, you’ve got to ask yourself. On the one hand, Ghosn was allowed to get away with financial murder for a long period of time. How can you, as a Chief Executive, steal money or take money and not disclose it in the audit committees? You’re a public company, for heaven’s sake – one of the biggest in the world. On that one side, he’s clearly overstepped his authority. On the other side, you have people within the Japanese community and on the board of Nissan who did not want to continue with his merger with Renault which, by the way, would have given Renault (even though it’s a smaller company), a bigger say in the combined grouping. They have now found another way to block him, to stop him, and to pull out skeletons from his cupboard. This man was arrested and he’s jail. He’s sitting in jail alongside his lieutenant, Greg Kelly.
Now, these two people – two weeks ago – were on top of the world. Certainly, when they walk around in Davos, people stop and look at them in awe. Well, I doubt that either of them will be in Davos this year and it just shows you that hubris is alive and well, and absolute power brings some very, very serious questions.
Yes, and you’re right. It’s striking how similar the tactics are in the boardroom, as they are in parliament where there are accusations of financial misdeeds (for all we know, true accusations of financial misdeeds) thrown about as part of a broader strategy for seizing power and as part of one faction moving against the other. In some ways, it shows how important it is that there’d be competition at high levels and that the powerful would be in competition with one another because it seems like the only way we’re going to find out about these malfeasances and these bad deeds is if they get exposed in the shuffle of power.
Well, again I’m going to refer to what Pravin Gordhan said in his testimony this week. Remember, it’s three full days so there’s a whole lot to it. He said that from the outset, the ANC positioned itself as a party that would look after the majority and when the transition came, that it would be sure not to allow an elite grouping of people to achieve/access the ‘spoils of war’, and that’s exactly what he says has happened in the past ten years in the South African environment where the state’s resources have been diverted into the pockets of the few. It’s an identical process in business. If you do not have democracy pushed to the final limit to appoint, where those who are put into power are held responsible, you will get the consequences that we’re seeing now with Carlos Ghosn and Nissan. Eventually, the penny has to drop with shareholders.
It’s the shareholders who must be making those demands on the powerful and the reality with Ghosn, Jacob Zuma, Razak in Malaysia, and with Rousseff and co. in Brazil is that the public/people do really have this power. It’s just that sometimes they don’t use it. They don’t implement it correctly. In the long term, democracy works but it only works if the population – and it’s not just democracy in a public or political sense, but in a corporate sense as well -… It only works when those who have the votes actually take an interest…take care and go forward, and apply the power that they have been given. You get instances (like in Ghosn’s case) where this guy has really just stolen (it appears) and similarly, with Steinhoff and Marcus Jooste and that is something that’s very difficult to detect while it’s happening, but there are signals and we all need to be more aware that in this more transparent world, those signals are a little easier to pick up than they were in the past.
You mentioned Jooste there and as we kind of glide to the finish here, I wanted to quickly pick up a bit on Steinhoff. It was a pretty big week for the company. They announced a new CEO, Louis du Preez and they also announced that Mattress Factory in the US has more or less emerged from its Chapter 11 bankruptcy in much better shape. It shed about 660-odd stores but it’s still in operation. It’s still a going concern. They’ve raised another $500m-odd of funding and it looks like that business will live to fight another day. They also announced that they are a step closer to wrapping up negotiations on dealing with all the rest of their debt, especially the European debt so the company’s actually taking some steps back towards…if not rude health, at least back to the rudiments of health.
Mattress Firm is a story all on its own. There, the banks effectively own it now because what happened in the Chapter 11 was that it was going to go bust. Essentially, in a company, when your liabilities exceed your assets by a high degree, you really have two options. In the United States, you’ve got the option of going into Chapter 11 – talking to those people that you owe money to, restructuring your business accordingly, and then coming out of it as a going concern and in many ways, that’s what Steinhoff is trying to do all around the world and this is a really nice example of it. The Mattress Firm, which was bought for nearly $4bn in 2016 (remember that) is horribly bankrupt, owes a lot of money to banks, got together with Chapter 11 saying ‘well, this is the last gasp saloon. Let’s get around the table and see if there’s anything we can do to rescue this company’.
The banks said, “Fine. We can do that. We’ll actually continue to lend you the money.” They’re not converting debt into equity. The debt is still there “but we want 50% of the equity of this company. We want 50% ownership of Mattress Firm, just to keep you in business” and that’s effectively what’s happened so Mattress Firm, which was bought for $4bn is now worth zero. It is now owned – 50% by the banks, who still have to be repaid – and during that whole process, the banks together with the management at Mattress Firm said, “The only way that we’re going to make this company work is by closing hundreds of outlets and retrenching a whole bunch of people, etcetera.” So, the biggest challenge is that the banks aren’t going to foreclose but the challenge for Mattress Firm now is to find a way of operating, repaying the banks and eventually at some point in time, giving the Steinhoff shareholders a little crack at it.
I guess it’s like you have an opportunity of one day, getting some of that $4bn back but the most sensible way as an investor, is to look at this and just say, “Look, it’s worthless.” Let’s hope that there’s a bonus at some point in the future but it’s going to be lots and lots of years of hard work by the managers of that company before they’ll be in a position to actually reap any rewards.
That’s certainly true but I think from the perspective of suppliers and employees, the fact that the company remains a going concern is definitely some consolation and that sort of complete disruption of the industry has been avoided by the bankruptcy process. For me, it also kind of highlights the value of the US bankruptcy process. It’s one of the more forgiving processes in the world. They have Chapter 11, which just sort of enables companies – when there’s an absolute crisis, as we saw at Mattress Firm – it lets them have a path to keep going and creates a pathway back so that we don’t completely lose all the built-up economic value that the company’s created. You do sort of get to have something at the end of it and it’s a better process I think, than in many countries where these firms just end up getting dissolved entirely and that being very disruptive, of course, for all the upstream and downstream businesses that rely on them as well as their employees.
Yes, there is a similar thing in South Africa with Business Rescue, which we haven’t seen too much success with yet but presumably, it will come out. However, the UK has got a similar one called Company Voluntary Arrangement (CVA)., which is like Chapter 11 and again, there’s a South African angle to that story in that Famous Brands (you might remember) who bought a company called Gourmet Burger Kitchen in 2016. It was a bad year – 2016 – for South African companies in the international acquisitions, particularly with Steinhoff and Famous Brands. They bought it for… Well, they paid over R1bn for this company and it’s gone into CVA and the same thing there…this one hasn’t come out of it yet but it’s the same thing. Renegotiate with your creditors and your creditors in the case of Gourmet Burger Kitchen, are primarily landlords. Where you’ve got all of these stores, how many of these stores are you going to close down? Can the landlords give you a better deal on the rentals, etcetera? It gets back to doing acquisitions and looking at your due diligence. Clearly, in both cases, this was lacking.
