MICHAEL AVERY: Patel-enomics: dirigiste nightmare for business

I read President Cyril Ramaphosa’s prepared speech to the black industrialists conference this past week and was overcome with pity. He and his government continue to mischaracterise the root cause of SA’s failure to grow the economy in real terms and bemoan the fact that we aren’t witnessing the rise of more Mike Tekes and Patrice Motsepes as some sort of funding conspiracy by the banks and a mysterious market failure that his Competition Bulldog will one day dig up in yet another taxpayer-funded market inquiry flight of fantasy.     

Sadly, this is not just politicking to a key funding base ahead of the election. You can see he truly believes it and is no doubt in thrall to trade, industry & competition minister Ebrahim Patel, who seemingly whispers into his ear at every opportunity just how nasty and greedy and self-interested business in SA is.

He’s right, of course. To survive and try to grow a business in this economy with all of its mostly government-inflicted binding constraints, from power to water and human capital thanks to the dysfunctional public education system, one has to be ruthless. You need to be greedy to the point of protecting your market share with every ounce of strategic acumen and be totally focused on self-preservation (call that self-interest if you will).

To say that black business people — who will hopefully be so wildly successful that they will one day create a smokestack industry — struggle to access funding is to repeat one of the most well-worn challenges in entrepreneurship regardless of skin colour.

Ask any entrepreneur who is pre- or post-revenue how hard it is to access capital. And for good reason. Banks aren’t in the business of building industrialists; they are in the business of protecting depositors’ savings and wealth. If your business case is solid, with a reasonable prospect of producing what a large enough market wants at a lower cost than your competitors, sustainably, you won’t struggle to find capital. 

But Patel has seized on the struggles his anointed industrialists are having in cracking the entrepreneurship code to bend the president to his will. Applying the wrong medicine to the problem is manifesting all through a sick economy.

Last week Remgro CEO Jannie Durand, while not mentioning the competition authorities by name, delivered a stinging rebuke when discussing how long it is taking for its 57%-owned subsidiary, CIVH, to get approval for a multibillion-rand fibre deal with Vodacom. “The uncertainty with regulatory approval creates uncertainty for foreign investors to invest in our country,” he said.

Afrimat is having similar issues with its multibillion-rand Lafarge deal, with more than 800 jobs in limbo. And it’s worth considering the effect of the intervention by the Competition Commission on the SAA transaction. Delays in the approval process, and the requirements that were imposed by the competition authorities on the deal, were cited as among the reasons for the parties to walk away. 

The transaction was filed with the commission in June 2022 but was only heard by the tribunal on July 24 2023, despite the deal being absolutely critical for the survival of the airline. Then, the commission recommended approval of the deal subject to crippling conditions.

First, it required that the minority shareholders in the Takatso consortium, including Gidon Novick, sell their shares based on concerns that there might be anticompetitive information sharing between SAA and Lyft. This is unusual: in cases where a shareholder also holds a minority shareholding in a rival the commission will generally simply require that adequate information sharing barriers be put in place.

It seems the commission was concerned about preserving competition in SA on routes shared by SAA and Lyft. But it ignored the reality that without support from an experienced industry insider there was little prospect that the business would run profitably. Ask anyone who is trying to fly around inside Africa what that means in practice: few flights, long delays and high prices.

It seems we ignored the reality — already manifesting in Europe — that scale is everything in the airline game. Perhaps only a combined SAA-Lyft business could succeed against the continent’s other players and numerous European and American powerhouses in winning a share of the global business? 

The commission also insisted that minority shareholders sell out of Takatso before the SAA deal closed. This in effect placed them in a position to hold their partners to ransom — there was no backup built into the conditions for what would happen if the minorities failed to agree on a price for their shares or identify a suitable buyer. 

Finally, despite burning through R30bn in taxpayer funds and SAA’s financial statements reflecting losses of R23.5bn in 2018-22, the commission required that SAA maintain a total aggregate minimum number of permanent employees of 1,647 for five years. Five years in the airline industry is an eternity.

The SAA business rescue practitioner, who took a long, hard look at this business before the Takatso deal, recommended as part of the airline’s rescue plan that the workforce be reduced from about 4,700 to only 1,000.

The debt at the heart of the business hasn’t vanished. Without the Takatso deal it’s unclear who will shoulder it. Despite the rosy predictions of SAA’s new board, without more hefty bailouts by the government (which it cannot afford) or a big cash injection from a suitable purchaser, SAA will eventually crash into the debt mountain. Then there will be no jobs at all. 

Unfortunately, this is yet another instance of a toxic trend in which the commission is focused on job preservation and fostering “greater spread of ownership” rather than understanding market dynamics and driving efficiencies.

• Avery, a financial journalist and broadcaster, produces BDTV’s ‘Business Watch’. Contact him at Badger@businesslive.co.za.