Thursday, December 31, 2015

Unions Call The Tune On Investing Their Own Money


This article first appeared in the Business Times section of The Sunday Times on 13 December 2015.


This week Minister Mildred Oliphant set the cat amongst the pigeons when she confirmed her comments made at the COSATU National Congress to POWER98.7’s Tim Modise

She alleged that trade unions, in and outside of COSATU, have interests in labour broking firms and remain invested in companies benefiting from Gauteng Freeway Improvement Project.

Challenged to present evidence, Oliphant said she had the evidence in her possession and has also requested the unions to carry out their own investigations.

The Minister must have touched The National Union of Metalworkers of South Africa (NUMSA) on their studio, leading to a lengthy press statement in response to her ‘spurious accusations’. The union alleges that Minister was ‘sub-tweeting’ it in her comments. 

This exchange has re-opened the issue of the purported independence of trade union-owned investment companies and their shareholders.

Naturally, NUMSA denies they have any financial interest in any company involved in labour broking. But hold on.

If the NUMSA Investment Company claims to be independent of NUMSA the union, why not then invest in any company they wish, including labour broking firms? 

If CEO Khandani Msibi’s main concern, as head of an independent investment business, is deriving maximum return from the capital deployed, why would he not consider an investment in a business that supplies temporary staffing solutions?

Says Msibi “If you look at the listed environment, shareholders like pension funds and the like, would decide that they do not want to be associated with certain products like cigarettes or liquor for various reasons. Similarly, I think we need to be sensitive to the aspirations and sometimes, the dislikes of our shareholders." 

"However, there have been instances where unions instruct their investment companies not to invest in industries where the union is organising. And when we [management] came in and took over the NUMSA Investment Company, it was one of the resolutions we took up for review and we said to NUMSA, ‘if you are organizing in a company that we believe is of value from an investment point of view, we should not be precluded from investing in that particular company’. We were able to persuade NUMSA to revoke that resolution.”

This therefore means, an investment company, wholly-owned by the trade union can easily find itself on conflicting sides to the interests of its shareholder – which in itself contradicts the notion that union investment company interests must always be aligned, or at least sensitive, to the aspirations of its shareholder.

For example, imagine the NUMSA Investment Company was a shareholder in a motor manufacturer, which found itself in the middle of a dispute with NUMSA. In whose interest would the investment company act?

Let’s suppose the union is demanding a 15% wage increase and the board is offering 6%. What does the non-executive director serving on the investee company board, as a representative the union investment company do?

According to the Companies Act, that non-executive director’s fiduciary duty is to the investee company, not the union investment company, and certainly not the union. 

By law, the director is compelled to act in the best interest of the company. In this instance, the best commercial interest of the company could be settling on the lowest possible wage increase, while the union would seek to secure the highest possible increase for its members.

The irony of this independence debate is that Kopano ke Matla, COSATU’s investment company, invested in construction company, Raubex, prior to it being awarded work in the e-tolls project.

Of course that didn’t stop the DA and other opposition parties calling out the ‘hypocrisy’ in COSATU, who on the one hand wanted e-tolls abolished and on the other, benefitted from the project through its investment company. Then CEO of Kopano was forced to resign as Chairman of Raubex in an unsuccessful attempt to prevent a perceived conflict of interest.

Trade unions will do well to park the Marxist literature, and heed the Good Book’s advice. ‘Then you will know the truth, and the truth shall set you free’.

The truth here is that union-owned investment companies are not independent of their shareholders. 

Unions know this. Union-owned investment companies know this.

NUMSA’s response to Minister Oliphant’s utterances, essentially on behalf of its investment company, underscores the inextricable and umbilical chord-like connection between the union and its investment company. 

The rest is just smoke screen.

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 13 December 2015.

Click here to listen to Khandani Msibi's interview on POWER Business with Andile Khumalo

Airline's Hopes Flew Way Above Reality For Start-Ups

This article first appeared in the Business Times section of The Sunday Times on 6 December 2015.


This week, domestic low cost airline Skywise’s operations were suspended by the Airports Company South Africa (ACSA) due to unpaid airport charges for landing, take off and parking of aircrafts.

Skywise was founded by Tabassum Qadir and J. Malik with the first daily scheduled flight taking off on 5 March this year.

Until Wednesday’s suspension, the airline serviced Johannesburg and Cape Town, with a daily schedule of six flights a day with its one leased Boeing 737 aircraft.

The suspension caused tremendous inconvenience for Skywise customers, especially the passengers stuck at airports in mid-week with no flight home.

So what is the real problem?

According to the Co-Chairperson of the airline, Tabassum Qadir they had estimated that it would take a few months for the new airline to break even.

“Any business takes six to eight months to break even. Then you come to a point where you start making money and profits in the peak season. This [December] was our peak season time. Even if we didn’t get the capital injection, we were good enough to go with the peak season.”

So Skywise founders believe that it takes a few months for any business to break even, and that the business model of domestic low cost carriers is to lose money all year and bank on a bumper December to make it all back and take some profits with. And in their case, ACSA is standing in the way of their payday.

If there is a business out there that breaks even within six to eight months, I want in. Furthermore, aviation is a thin margin industry that is extremely capital heavy and cash hungry.  

Taking into account that the business of aviation requires a long-term commitment as well as deep pockets, how could Skywise's founders believe their business would break even in its first year of trade?

Did they ignore the tough economic climate and lethargic GDP growth curve that South Africa finds itself in?

What about the tight competition in the domestic low cost carrier market?

I do not want to believe that the entrepreneurs who invested R70 million of their own cash, could possibly be this naive. I am left with only speculation: The founders did not raise enough capital to carry the business.

The company was put on a “pay as you fly” plan after ACSA refused to extend and further credit to it, and the parties agreed on a six-month payment plan. Skywise made good on two payments and then struggled to keep up. The cash they hoped to generate was inadequate to fund the business, and the founders had already exhausted their capital.

This is not a new phenomenon and most successful entrepreneurs have been here before, at great cost to the reputation of their businesses.

Qadir concedes “Its not easy to start an airline. It was four years of hard work. And we are in operation for only nine months. We put in personal funding of R60 million – R70 million in the business. According to our business plan we were supposed to only make a profit in December and then continue to, going forward”

So a part of me sympathizes with the Skywise founders. I admire their bravery in entering aviation sector and am saddened by the strain they are having to manage.

However, I am also disappointed. I am disappointed by the business plan, which sounds more like “a hope” than “a plan”.

Blaming ACSA for suspending its services to Skywise due to non-payment, is not credible. Writing an open letter to President Jacob Zuma asking him to intervene is incomprehensible. If the airline has indeed secured equity investors to inject further capital, I sincerely hope they don’t expect a return in six to eight months. They would be lucky to see one in six to eight years.

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 6 December 2015.

Polish Your Skoroko: The Ride Will Be Tough

This article first appeared in the Business Times section of The Sunday Times on 29 November 2015.


In the mid-80s, ‘Skororo’ hitmaker Condry Ziqubu released another catchy tune, which I was convinced, was about ‘Mello Yellow’, the popular soft drink launched in the same era.

This week, a friend reminded me that ‘Yellow Mealie Meal’ was written to highlight the plight of Black South Africans in the aftermath of the hard-hitting droughts of 1982.

The punchy lyrics open with: “Hey look. Up there. Sun is very hot. Hey look. Up there. No thunder, no lightening. God of rain. Your children are crying, There’s no rain. Everybody’s singing this song. Yellow, yellow, yellow mealie meal”.

Last week the reserve bank governor, Lesetja Kganyago stood in front of the nation and announced the central bank’s decision on interest rates and updated its forecasts on GDP growth. A number of South Africans, whether working class professionals or entrepreneurs may not fully appreciate the impact of the current state of affairs, and how they ought to react to it.

The governor summarised matters well when he said “The key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices and the possibility of additional electricity tariff adjustments. At the same time the economy remains weak.”

The comfort that rising interest rates are going to tame inflation, which is expected to breach the top end of the 3% - 6% range, have all but disappeared as the causes of real inflation have little to do with interest rates.

As the worst drought since Condry Ziqubu’s hit ravages us, we are likely to face serious headwinds on food prices in months to come. Climatologists say we should not take much comfort in the recent rains, as significant showers are only expected next March.

According to Grain SA, South Africa is expected to spend at least R2.2 billion on yellow maize imports of almost 1 million metric tons of from countries such as Argentina and Ukraine in the year through to the end of March 2016.

This week, Eskom reported interim results that showed a 13% increase in power prices, which helped its net profit climb to R11.3 billion. These were bitter-sweet news. We all want a successful Eskom who has enough to spend on maintenance to avoid further blackouts, and a constructive hamstring to the economy. But this doesn’t come for free. South Africans have no choice but to brace themselves for additional electricity tariff hikes.

Add to this mix a weakening rand, the volatility around a potential US interest rates hike, the uncertainty of wage negotiations in early 2016, and an economy that is forecasted to grow by 1,5% in 2016, you soon appreciate the tricky terrain we have to navigate in the next 12 months.

As an individual the choices are relatively easier to understand, avoid debt, especially unproductive debt. You are likely to start earning less in real terms as your employer sees lower profits in an economy that grew by only 0,7% in Q3 of 2015. Those big salary increases and fat bonuses are likely to be a fond memory. Reality check: A 6% salary increase is essentially a 0% salary increase in 2016.

Dr. Adrian Saville, Chief Strategist at Citadel Wealth Management has one piece of advice for businesses in these times. “Our estimates now is that economic growth going into 2016 could actually be sub-1%, and therefore businesses will have pressure on the top line, which means that your competitors will be trying to get at you, by eating into their own middle line. In other words, not only are your revenues going to struggle but so are your margins, leaving less to trickle into the bottom line. So what can you do? The first rule in these times is to survive. It’s the same as South Pole expeditioning. It’s not about who gets to the South Pole or top of the mountain first. It’s who gets home.” says Saville

Now is the time for resilience. The only way you can enjoy an economic recovery is to be there. It is also time for prayer. Prayer for more rain. Otherwise, we will all be singing yellow mealie meal in our skorokos for longer than we wish.

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 29 November 2015.

'Once Empowered, Always Empowered' Rings Untrue

This article first appeared in the Business Times section of The Sunday Times on 22 November 2015.
A mine shaft is seen near Carletonville, west of Johannesburg, July 20, 2015. File photo.
Image: SIPHIWE SIBEKO REUTERS

The results of the 10-year review of the Mining Charter and the subsequent squabble between the Chamber of Mines and the Department of Mineral Resources has brought up a key question about Broad-Based Economic Empowerment (BBBEE), and whether or not the policy can sustainably transform the ownership profile of the South African economy.   

The question of ‘once empowered, always empowered’ is central to the success of BBBEE and remains unresolved, perhaps for a good reason. 

Is it fair for a white-owned mining company to sell 26% of its equity to Black shareholders, often at a sizeable discount and great cost to its earnings, as well as practically finance the deal, only to end up with zero empowerment credentials when the Black shareholders settle their debt, sell and move on?  

On the other hand, can a South African mining company genuinely claim to have transformed an industry if it does not measure its transformation by taking a snapshot of its share register, at any given time, and see black shareholders owning more than 26%?  

And what about the right to sell? Surely the Black shareholders, assuming they are no longer encumbered and are past the lock-in period, have the right, like any other investor, to realise their investment and do as they wish with their wealth. 

The Chamber of Mines calls the charter ambiguos on this issue. I think what they meant is they find it unfair, not unclear. The charter statesIn order to increase participation and ownership by Historicaly Disadvantaged South Africans (HDSA) in the mining industry, mining companies agree to achieve 26% HDSA ownership of the mining industry assets in 10 years by each mining company”.  

A lay man’s reading would therefore expect a measure that would value the total mining industry and compare that to the value of mining industry shares owned by black people. Apparently it is not that simple. 

Former Minister Ngoako Ramatlhodi tried arguing this. He was unsuccesful and eventually capitulated, leaving it up to the courts to decide.   

According to the Minister, he and the Chamber could not agree on the "principles applicable to assessing the ownership element" of the charter and therefore agreed to take the matter to the High Court for a declaratory order "to guide on the correct interpretation".   

It seems the Minister was happy to be bound by the interpretation of the courts, but not the Chamber of Mines.  They insisted on keeping the window open, and to appeal the decision, if it didn’t favour them 

I don’t blame the Chamber for this stance. If the court found against them and their 72 members who represent more than 90% of mineral output in South Africa, its members would need to do brand new BBBEE deals or face losing their mining rights. 

However, the charter goes into great detail, outlining its principles and intentions, specifically in relation to ownership. With due respect, the Chamber’s issue is not and has never been about the principles. 

Ask any economically active South African what BBBEE is trying to achieve, and notwtshtanding their disappointment with its effectiveness, they will tell you its about trying to get Black people into the mainstream economy, and that’s the principle. 

When the government and the industry couldn’t take the public criticism of going to court to argue empowerment, they decided to attempt settling the matter out of court. Minister Ngoako Ramatlhodi was ‘reshuffled’ and enter new Minister Mosebenzi Joseph Zwane.  

The final outcome of these offline discussions was mining companies being temporarily exempt from the provisions in the Broad-Based Black Economic Empowerment Act ,which essentially means that mining companies, at least for the next 12 months, are governed by the DTI’s Codes of Good Practice and not the mining charter. 

This is meant to be a temporary measure while the Mineral and Petroleum Resources Development Act (MPRDA) and its underlying Mining Charter are being reviewed.  

Its taken the whole of 2015 for government and the industry to agree on what they signed 11 years ago, and there’s still no agreement

I suspect the industry has pulled one over the government here and created room for further extensions of this exemption. 

This will undoubtedly strengthen their leverage in having the provisions they want in the revised mining charter.  

Whilst all parties will keep fighting for their respective positions, the key issue of ‘once empowered, always empowered’ remains unresolved. 

I think this important question alone could mark the beginning of the end of BBBEE in its current form. Perhaps that too, is not a bad thing. 

Andile Khumalo is the CIO of MSG Afrika and MD of POWER 98.7. He also presents POWER Business on POWER 98.7 at 5pm, Monday to Thursday. This article first appeared in the Business Times section of The Sunday Times on 22 November 2015.