South Africa

Op-Ed: Why South Africa must do better

By Greg Mills & Jeffrey Herbst 8 July 2015

Our new book, ‘How South Africa Works – and must do better’ is released this month. In tackling the unemployment crisis, the book examines the challenges and opportunities across key productive sectors. While the current system of social grants has helped to reduce poverty, like the redistribution of wealth through and expansion of public sector employment, this is not a sustainable, long-term solution. To turn this situation around, skills have to be systematically raised and employers incentivised to take on more workers. But it’s not all bad news. ‘How South Africa Works’ identifies steps that some of South Africa’s most exciting entrepreneurs have taken to build world-class enterprises. By JEFFREY HERBST and GREG MILLS.

While the end of Apartheid in April 1994 brought about political rights for the excluded black majority, their economic enfranchisement over the subsequent two decades has proven to be exceptionally difficult. The fundamental claim of our new book is that the overwhelming challenge that South Africa faces, and has to date failed to address, is unemployment.

As is well known, the current unemployment statistics are appalling and fall especially on young African youths who were promised a better future in 1994. If the unemployment crisis is not addressed, it will be impossible to lift many millions of people out of poverty. Especially in light of the Arab Spring – fuelled in good part by youths who believed that they had no future – the stability of South Africa cannot be assured given compounding issues of insecurity, unemployment and lack of investment. The prospects of the African National Congress (ANC) will also be challenged if it cannot deliver jobs to the ‘born-free’ generation. Equally, the ANC’s trade union partner, the Congress of South African Trade Unions (Cosatu), with an ageing cohort of members, requires economic and employment growth to refresh their membership.

Two decades and five ‘new’ strategic economic plans into its democratic transition, South Africa does not have the luxury of too many more chances. We also do not believe that South Africa can solve the unemployment problem solely through redistribution. The most dramatic redistributive steps that South Africa has taken are broad-based black economic empowerment (BBBEE) and the social grant. BBBEE, like its predecessor, black economic empowerment (BEE), has succeeded in creating a small class of African business people who have wealth on the same order of magnitude as very rich whites – 10% of the Top 100 companies on the Johannesburg Stock Exchange are held directly by black investors largely through BEE schemes – but it has had no perceptible impact on unemployment. As a project of elite transformation, BEE has been successful, but it is more a burden for employers than a transformative agent for the unemployed. The social grant has been a great success in keeping an increasing number of people out of absolute poverty, but it pays far less than the salaries of even those with unskilled jobs. Simply put, South Africa is not sufficiently rich to redistribute enough resources to address unemployment. It must expand the economic pie and increase the number of jobs if the poorest are to benefit.

The book differs from many other retrospectives in that it digs deep into South Africa’s economic workings through extensive interviews with a broad spectrum of business managers, government leaders, unionists, entrepreneurs, taxi drivers and farmers, among many others. The country’s future is being built daily on the shop floor, on the farm, down in the mine and in corporate boardrooms where South Africans are making millions of uncoordinated decisions that cumulatively will determine the country’s future. These decisions are made in contexts that are established by major policy documents, but also by how legislation and regulation are understood and executed by officials at every level of government.

While we necessarily focus on what has gone wrong in the South African economy, there is also a deep vein of entrepreneurial talent that, if the national economic climate was better, could jumpstart the economy and provide more jobs.

Below, we focus on two companies that, despite all of the current challenges, are internationally competitive and increasing employment.

Neal Froneman is CEO of Sibanye Gold, the largest producer of gold in South Africa. Sibanye, meaning ‘We are one’, was formed in 2013 from an unbundling of Gold Fields Limited, the company started by Cecil Rhodes and Charles Rudd in 1887. “It was spun off because our mines are deep, high-risk, labour-intensive operations.

“We were able to take the assets performing badly in Gold Fields’ hands and turn them around in two years,” he says, “into the best performing gold share internationally. We were able to do this because we have tabular ore bodies with good grades that are extensive, and because we were able to get our costs down. With 55% of our costs in the form of people, we ‘displaced’ 7,000, but saved 35,000 other jobs in the process.”

Despite this success, Froneman is concerned about the challenges South Africa faces.

“It’s difficult to operate here because of regulatory uncertainty and a very inefficient labour system, which reflects our history and the political role of organised labour.” But he does not accept that it has to be that way. “More than anything,” he adds, “the unbundling was driven by a vision of a company that I did not accept had to be high risk because of the deep ore bodies and inefficient because of our labour regime.”

Success demanded a more proactive role with his workforce and the community.

Froneman moved Sibanye headquarters from the Gold Fields operation in corporate Sandton to Westonaria, right near their four mines. To win the hearts and minds of the mineworkers, he has started regular and direct dialogue with them, and not only through the unions. “We have taken back the right to communicate and engage directly with employees – stupidly in the past we had become almost a surrogate of the unions in this regard.”

The next stage was to assist with worker education, not least to help them budget and deal with their debt. “Our miners are burdened with garnishee orders, and we have helped them with numeracy programmes and assisted in consolidating their debt.”

And Sibanye engaged directly with the communities in which they operate. “Instead of building schools that we then handed over to the municipality to hand over to the community while crowing how little the mining companies do for them, we now deal directly with these communities. We need stable and supportive communities without which we don’t have a viable business.”

Sibanye is also investigating profit-share arrangements. The aim behind all of these initiatives to “get the employees to think much more who is helping them in the next round of wage negotiations” through “sharing in the good times and working harder together in the bad ones”.

He stresses, “I am not saying that unions are not required to protect workers. To the contrary, we need a strong social component to business operations in South Africa given this is the best way to create value for shareholders in our environment and given our history. Yet if you had a more efficiently driven labour market, it would certainly be much easier to operate.”

This is not the only constraint. “BEE has been a dismal failure. Attempts to redo it,” says Froneman, “are not fundamentally investor-friendly.” Equally, efforts to create a state mining entity are problematic. “Personally I think it will be a failure, not least given that there is no shining example of a state-owned company, and why should this be any different especially in a difficult, highly complex and highly technical business like mining?” he asks. “If you do this with state money, or state pension money in the form of the Public Investment Corporation, this would simply be irresponsible. Instead of thinking about creating a South African mining entity with the best talent and management, and available sources of capital, we are locked in a paradigm about racial ownership.”

And this relates to what is the most costly aspect of the relationship with government and its partners. “This is a labour-intensive industry,” reflects Froneman, “which should be nurtured by government. But it’s not. It is despised.”

At near the other end of the technological spectrum, but also competitive and generating employment, is Canvas and Tent which in 2014 won the award for the large exporter of the year in KwaZulu-Natal. The origins of the tent manufacturer, which employs 860 workers at its Ezekheni factory, are in South African Defence Force requirements and contracts. By 1996, with the decline in military demand and expenditure, the business had collapsed, being bought out of liquidation by a private Pretoria-based entrepreneur Eric Goldblum and Nedbank. Since then it has, in Goldblum’s words, “grown organically”, securing large British Army contracts en route, and also moving into the top-end safari, deployable mining and United Nations camp business.

“It was very difficult in the beginning,” says company CEO Louw Bekker. “Our design process was done by hand, and our frames were outsourced. We went over to the United Kingdom three times a year looking for work, initially trying to supply canvas. Then we got a contract to repair 20-odd container loads of British Army tents, which arrived from Afghanistan, before we picked up an order for four 600-man British Army camps as a supplier could not deliver. This changed our lives. We improved our design as the orders flowed in, and upgraded our machinery and increased the number of jobs.”

By 2014, 60% of revenue was from export orders. Although the military work has dried up with the ramping down of involvement in Afghanistan and Iraq, Bekker, who worked previously at the South African Bureau of Standards, says 97% of employees are from Ladysmith, while 80% were “employed at the gate”. Canvas and Tent runs a training school, with 20 graduates annually, though there are still shortages in skilled labour. A R15-million grant from the Industrial Development Corporation was used to purchase overhead carrying lines from Sweden and the latest technology in cutting machines. “This has,” says Bekker, “put us into a different league with regard to automation.”

It has not all been easy. In 2008 the firm suffered a paralysing strike, one result of which is that it employed a change manager, and another the retention of a labour consultant. “We slept in the workers’ homes and took taxis to work,” recalls Bekker, “and visited their places of worship. This helped us to build a team,” a process aided no doubt by having one of the higher wages on offer in the area.

Even in those sectors of the economy where labour relations have been historically fraught, a different management style can change things for the better.

These two examples show that South African companies can be competitive and can hire more workers. However, there will not be many more successes unless government focuses with laser-like intensity on creating a climate where entrepreneurs can succeed. That environment does not exist now, which makes the few successes especially notable. South Africa can still turn its economy around and meet the ambitions for the ‘born-free’ generation but only if dramatic steps are taken now. DM

Dr Herbst is the 16th President of Colgate University in the US and the CEO-designate of the Washington-based Newseum; Dr Mills heads the Brenthurst Foundation in Parktown. Their book ‘How South Africa Works – and must do better’ is released this month by Pan MacMillan.

Photo: Blade Runner’s Johannesburg, by Andrew Moore.

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