Investec’s Stephen Koseff: How to recover the trillion rand Zumanomics cost SA

DAVOS — In this wide ranging interview from the deeply thoughtful Investec co-founder Stephen Koseff, he covers Brexit, geopolitics, the purpose of Davos, South Africa’s promised rebound and his now involvement in the recovery process. Koseff puts the overall cost of the nine years of Jacob Zuma’s misrule at a staggering trillion rand – a direct loss to the fiscus of almost R300bn. Always a fascinating conversation, Koseff says it has been tougher than anticipated to “get the flywheel turning” but it is starting to move. The key ingredient, he says, is hope. A must listen. – Alec Hogg

Davos 2019 – this coverage of the global conversation on change is brought to you by BrightRock, the first ever needs matched life insurance that changes as your life changes.

I’m with Stephen Koseff. Stephen, we chat every year in Davos. The mood two years ago was fraught. Last year excessively optimistic perhaps. This year, a bit more realistic?

Yes, I’d say neutral to slightly negative. I just listened to the Chinese vice-president, he was exceptionally positive. I listened to the Japanese president, he was exceptionally positive. I listened to Angela Merkel, she was moderate but I would say, a little bit more positive. But obviously, the IMF is forecasting a slowdown, the Chinese growth was a bit slower than people expected but they still expect China to be the biggest economy in the world, in the not too distant future. So, I don’t think you have to be too negative. I think there are big issues in the world but from an economic point of view, the economies are still growing and even if at 3.5%. It’s well above the 3%, which is what people consider to be underlying global growth, before you go into some kind of global recession.

What about your two major markets, SA and the UK?

The UK we’re watching this whole story on Brexit or no Brexit, or hard Brexit, or soft Brexit – it’s just very confusing. Obviously, the Pound is saying something to us. The Pound has been appreciating, which says there’s probably not going to be a hard Brexit. But we’re either going to get a revised version of Theresa May’s Brexit or, you don’t know, they could go back for an election. They thought of ruling out a referendum at the moment but I hear stories that they may end up having another election, which surprises me.

I went to the PwC CEO’s feedback and the one thing that was interesting was British CEOs are very excited. They’re amongst the most optimistic in the world, because they think that Brexit is going to deliver significant opportunities, which was a surprise to pretty much everybody who saw it. How are you seeing it from that side of the water?

I think if you get a hard Brexit it’s going to be a big headache in the short-term. I think a soft Brexit will probably be a little bit more of the same. Before the UK went into Europe, they were the sickmen of Europe and they came out the strong men of Europe, from a growth point of view. I would not have been in favour of Brexit. I was listening to the Europeans say today that they’ve got a trade deal with Canada. They’ve just signed a trade deal with Japan. They’re about to sign a trade deal with the USA. These trade deals take decades to conclude and now the UK have got to renegotiate all these trade deals so, as much as they think it gives them opportunity and they’re not bound by European legislation, they have to go through this whole process and how long will that take? So, I think they might be a bit delusional.

Those trade deals, and clearly, we don’t know the detail of them yet, but if they are significantly advantageous and the British people are clever enough to say, hang on a minute, we’re losing out, perhaps on a big opportunity here. Could that be something that would sway opinion?

I don’t know. I think the mistake with the referendum is you’re leaving a technocratic decision to the general population and they make emotional decisions on stuff that you need the technocrats to take. I’m not sure. I’m an internationalist. I believe in global trade. I worry about populism and I think that the world is a much better place when you share ideas, and I know that you get a bit of lob sidedness now and then, like the Americans versus the Chinese, but at the end of the day – sharing ideas, some people are more innovative, they come up with good ideas, and if the world can use those ideas then the world is better off as opposed to going into isolation.

I was listening to a Chinese guy and he says, why China fell backwards was because the emperors did not anticipate and they closed the borders to the seafaring nations. They didn’t adopt seafaring trade and that’s why they went backwards. That’s because they closed themselves up so, I think you close yourself up when you don’t trade with the world and expose yourself to the world. That’s why we come to Davos, is because we learn about what is going on in the world. We learn about what other people are doing. You learn about best practice. You talk to other people about best practice. That’s what creates growth. That’s what creates innovation. Not sitting and talking to yourself.

I was at a press conference with the SA delegation a little bit earlier, Cyril Ramaphosa, the president seems very upbeat. He’s talking like a fisherman. He says he’s going to bring back a bag full of fish from investors over here. It’s a nice sound bite but is it realistic?

I think that if you look at the world, I think SA – if he carries on the path that he’s going and he delivers on a promise – has a lot of opportunity. When you look at the emerging world or the developing world, whatever you want to call it. You can see SA… Even I got the sense at the IMF that when you look at SA, we have a lot of opportunity as a country and as a society. I think we’re in a much better space than we certainly… Last year we had Ramaphoria but if you went a year back, we were in a terrible space. Particularly, if you went to 30th or 31st March, when the then president removed the minister and did all sorts of things to adjust his cabinet. So, we’ve been through a very bumpy ride and I think we are now getting onto a path of renewal, or what they call a new dawn.

There’s a lot to fix. We’ve got SOEs that need to be fixed but at least you can tackle them. We have to get growing. We have to fix education. We have to recreate the entrepreneurial spirit and the ‘can do’ attitude. Still the visa mechanism – we have to give out skilled visas. We can’t be protectionists on that stuff because we’re short of 800 thousand-odd skilled people in the country. If you talk to these economists that are advising the minister of finance, they’ll tell you that we lack skills. We need to bring those in because we can’t create them in the timeframe, internally, than we need to. We’ve lost a lot of skills so, I’m reasonably positive.

I’m an optimist but I know we need to get our growth rate up to 4-5%. In fact, I’ll go live and say this again, if we had grown from 2010, which was a year post the financial crisis, at the rate we were growing for the few years, prior to the financial crisis, which is over 4% on average, 4.5%. We would have had an extra R1trn of GDP. Our tax take is 28-29% at GDP. That would have given the minister of finance an extra R280bn to R290bn of revenue against a deficit of R202bn, and the deficit would have been lower because we would have had less borrowings because we would have had higher growth and higher tax collection. So, we have to drive growth, that is the key.

And investment drives growth?

Yes, opportunity drives investment, which drives growth. So, it’s not only about investment. It’s also about fixing things on the ground and I think people will invest if they know that property rights are secure. There is an opportunity there because people are looking to grow. Everyone is looking to grow.

Stephen, two-years ago you launched the initiative where business started getting involved with government, trying to put its shoulder behind the wheel. How’s it being going in the past year? Is there still the enthusiasm that existed before?

There were a number of different initiatives. One was ratings so, let’s forget about that because we did get rating downgrades and that was impossible for you to defend because of where we got to on the 30th March 2017. But the one that I’m involved in is the Youth Employment Service so, we got our Government Gazette. It took a bit of time to get it through. Sorted out roundabout October last year. We obviously, now have to get all the corporates on side. We’ve got quite a lot on site so far, and the infrastructure is there. Now, we’re out there marketing and trying to pull them along so that they get the youth jobs going. We’ve seen some great stories with these youth jobs.

So, because I’m chairman, Investec didn’t wait. It did it’s 1,200 jobs. We had 200 at artisan school, 160 at hotel school, about 400 in a place called the Good Work Foundation, which is near the game reserve in Mpumalanga or Limpopo, I can’t remember exactly where it is. You see the enthusiasm of these youngsters, who are, some of them, reasonably well educated and others not, but they have attitude and have a good aptitude. Wanting to learn and the ideas that are coming out of their mouths – they’re going to take this year of learning and then go and do their own thing, and create their own jobs. It’s like getting the Jim Collins’ flywheel turning. It’s stuck but once it starts moving it starts picking up its own momentum. I’m reasonably optimistic that and the fund, which was raised about a year ago will be reasonably successful.

Has it lived up to your expectations?

I think things take longer than you think. Initially, Colin Coleman and I, we’re both co-convenors. We thought you just take from A and give to B. What we realised is, you find an individual who needs a job and place them in the corporates – there are no jobs in corporates. So, you have to create jobs so that’s part of what we’re doing is creating these new types of jobs. That’s why we decided to send kids to hotel school, and then they come out and part of the scheme is they get internships at some of the hotel groups, and post that – the guy is either a chef or something like that and he can go and do his own thing.

We’ve got an example of a guy who went to a hotel school, he became a chef. He started making little cupcakes at night and then his business got so big that he started his own business and employed 12 people from his family. That’s the kind of thing that you do when you get the flywheel turning so, I’m optimistic that with that kind of focus, with all the other initiatives that are taking place, we can make a big difference.

It’s an interesting point about the flywheel because here, in Davos, there’s a company called Liquidchefs, I don’t know if you know them. Adam Solomon, he came here

Liquidchefs, they started in SA.

This year they are doing 42 events here, they’ve got 85 people that they brought in with the SA ‘can do’ attitude. Why do you think can’t that be repeated?

Look, I think we just need to give people hope, and people need to be shown the way to be entrepreneurs. Not everyone grows up in an environment. I was listening the other day that only in 30-something percent of households have a father so, we’ve got a history that we need to deal with and this guy you’re talking about, he probably grew up in an entrepreneurial family. They probably spoke every night about business, which is not what all South Africans have the benefit of. So, he knows when he’ll be global and he’ll think globally, and he’ll go out there and say, where can I make a living and what can I do? And land up at Davos, it’s an amazing story and there are multiple stories of that from SA entrepreneurs, but not everyone has had that history and that benefit, and that’s what we have to address.

Stephen, you employ a lot of South Africans outside of the country. You’ve just said earlier that there’s a huge skills gap, 800,000 people. How do you pull those South Africans back home?

Some want to come back, if they have hope and opportunity, they come back. Most South Africans love the country and want to see the country grow and develop. Very few of them that I know, who don’t like the country, and if there’s opportunity for them a lot of them will come back because it’s actually quite tough living away from your core. You’re not at home.

There’s no doubt about that but they have moved away for opportunity, to begin with. There is a skills gap. Are these people, would the advice be to come home, start a new business, become an entrepreneur – is that the way? Because from what you said earlier, about corporates, if they’re not hiring where would these highly skilled people actually be employed?

There are skills gaps. You’re short of teachers, you’re short of electrical engineers, you’re short of IT specialists, you’re short of all sorts of people. We just don’t have them in SA to fill all the jobs so, there are those types of jobs, and those kinds of people we need in our country. Now, are they all expat South Africans? I doubt it. I think there are some but I think we’re going to need a lot more than expat South Africans to actually fill these skills gaps. So, what the issue, up to now, is that people couldn’t get visas. If you’re a foreign company and you want to put roots in SA and use SA as your platform for the African Continent, and you want to send your own people to run the business Home Affairs would have said, ‘no.’ Hopefully that side of life will open up because then we’ve lost the whole bet. People go somewhere else. They go to Kenya, to Mauritius, some even talk about Rwanda and some go to Dubai. We mustn’t lose out on that.

Stephen, I’d like you, just to close off with, to put on your investor’s hat now. If you look at SA Inc, or SA as an investment opportunity, is it a turnaround situation that is in the very early stages or has it still got quite a long way to go before it can hit an upturn?

I do think it’s the former. I think you’re in a turnaround. It does take time to build momentum, but once the momentum starts, or as I say, once the flywheel gets going it gets its own momentum. Just if you look at our stock market over the last 3 or 4 years, it hasn’t performed well at all, which is what has happened to a lot of emerging market indices. So, I think it’s going to be a very good time for people to invest. People will still want to see what happens in the election. They want to see what’s happening with land reform. We’ve heard what the president said in the manifesto, it’s not going to be land-grabs, if they can manage that properly and people can know that they invest there they’ve got security of property. I think we’re in for a good run, but clearly the hurdle is how strong is the president’s mandate in the election. Taking it from there, we can really get going.

You’ve mentioned Jim Collins and the flywheel and the book, Good to Great. Just tell us a bit about how that thing works.

I’m just saying that he uses the concept of a flywheel. It’s a big wheel that gets stuck and it’s very hard to move, but once you start getting it moving it starts building its own momentum. It’s the same as an economy – it gets stuck. Once you unblock the blockages and you start getting the positive type of attitude. You start getting the entrepreneurs saying, ‘I’m prepared to take bets – I’m prepared to have a go,’ and you have an enabling government that supports that kind of activity then it starts to move. As I gave you the example of the guy who made the little cupcakes at night, he was able to employ 12 people. He’s probably employing 30 people now. Those are the kind of things that gets an economy moving.

Where is the flywheel right now?

We’re trying to move it. It’s not moving yet.

So, it’s still stuck?

It’s like edging a bit, but we need a few things to happen. We’re getting it to sort of shift, but it hasn’t done a circle.

So, a lot of effort has been put, and the shoulders behind the wheel. What’s going to make it turn?

As I said, we need a decent outcome in the election. I think that there are lots of things that are happening between government, and business and labour. We need to be a proper partnership. It’s not about one or the other, and we need to put our country first and try and get this economy really moving. We need to get all that stuff. Our history, we’re seeing lots of stuff fallout from the Zondo Commission, this thing on the PIC, there’s that other one on, I think there are three things running at the moment, and that obviously, we just need all the stuff dealt with so that we can really move forward as a society.

Davos 2019 – this coverage of the global conversation on change is brought to you by BrightRock, the first ever needs matched life insurance that changes as your life changes.