TICKET TO RIDE SA START-UP EXPRESS

This article first appeared in the Business Times section of The Sunday Times on 13 March 2016

LAST week, I found myself in the midst of entrepreneurs who had come to witness the launch of the next phase of a Samsung-sponsored initiative aimed at supporting business ideas with a social impact.

The initiative, Launching People, seeks to find ways to mix talents and come up with sustainable solutions to societal challenges.

It may seem like a tall order, but the power of collaboration is unique, and, as proved in the pairing of a business coach and a property entrepreneur, potential game-changer results are possible.

The initiative partnered two individuals, Carol Koffman, a senior manager at Deloitte South Africa, and Jonathan Liebmann, a property entrepreneur and the driving force behind the rejuvenation of Johannesburg’s Maboneng Precinct.

Koffman and Liebmann’s collaborative effort has highlighted what, in my view, is the greatest bottleneck in creating successful entrepreneurs in South Africa.

In research conducted during their campaign, 49% of respondents believe they have a business idea that would work, but they don’t know where to start in making it a reality.

According to the Global Entrepreneurship Monitor, South Africa has an “alarmingly low level of entrepreneurial activity”. Only 12.8% of young people are involved in some form of entrepreneurial activity.

The finding wasn’t too surprising as statistics have shown us that almost 35% of young South Africans are unemployed.

But the part that really caught my eye was “don’t know where to start”.

Our country has an underdeveloped venture capital market. In fact, one may easily conclude that a traditional venture capital market doesn’t actually exist. There are a few funds that support ideas coined by people in the same social or business and sometimes religious circles, and that’s it.

Look at Stellenbosch.

A small town of 22km² is essentially the home of South Africa’s most innovative and successful start-ups. You may think that this is because the best ideas emanate from Stellenbosch.

No. It is because the best ideas in South Africa are likely to be better supported in Stellenbosch than anywhere else in the country. Why is that?

Capital and mentorship — the two most important ingredients needed to transition from good idea to great business.

As long as we don’t have sustainable ideas with adequately patient capital and meaningful relationships and all over South Africa, many great business ideas will remain exactly that: Great ideas and never businesses.

However, because not all corners of our country are blessed with the capital and business acumen that exist in this 22km² in the Western Cape, we need to be creative in solving this problem.

One of the ways we can mobilise capital for great ideas is the retail market. Here I am talking about ordinary, gainfully employed South Africans with an appetite for risk and excitement.

Most responsible young adults invest their hard-earned rands in conventional products such as unit trusts, endowment policies, fixed deposits, and pension and provident funds.

These are heavily regulated and have proved to be very secure investments, allowing many to care for their families and retire comfortably.

However, young millennials prefer a balanced view to investments.

Gone are the days of saving for when I’m 65. Many want to feel like they are in the heart of economic activity, and start-ups have become a sexy, albeit very risky, destination for capital they are “willing to lose”.

This is due to many start-ups being either spectacular successes or spectacular failures.

I suspect there are thousands of ordinary people with jobs and no interest in becoming entrepreneurs themselves who would welcome a platform that facilitated investment into South Africa’s best ideas, without the requirement of owning a property in Stellenbosch.

The problem is that no such platform has existed.

Until now.

Crowd funding platforms are probably the closest we have come to this. But while there are AngelList and Kickstarter in the US, no trusted platform to support ideas existed in South Africa — until Launching People came along.

It is a portal powered by an innovative ideas bank that filters and vets entrepreneurial ideas according to type, industry and nature of impact and channels and matches them to the right business partner, coach, funder or business collaborations.

It is a collaborative and dynamic solution owned by the contributors and entrepreneurs themselves.

Sponsor Samsung hopes that the government and other stakeholders will support this initiative.

I hope the platform will allow the ordinary Joe to invest in South Africa’s greatest ideas and give them a fair opportunity to eventually be South Africa’s greatest businesses.

BARCLAYS SELL-DOWN IS LOOKING UP

This article first appeared in the Business Times section of The Sunday Times on 6 March 2016

THE announcement by Barclays Plc that it will be “selling down” its 62.3% holding in Barclays Africa Group was met with relative negativity from most South African media.

Many read the much-rumoured step by the UK banking giant as a vote of no confidence in the African and specifically the South African economy. Nothing could be further from the truth.

First , we need to ensure that we distinguish between Barclays Africa Group (the former Absa plus banks in 14 African countries) and Barclays Plc (the UK-headquartered banking giant that owns a majority share in Barclays Africa Group).

Apparently, many of the African countries, including their regulators and central banks, initially misunderstood the announcement to signal the shutdown of Barclays’ in-country operations.

Even some customers believed this meant that the bank was packing its bags and going back to England. The bank had to urgently put together an extensive media campaign to calm everyone ’s nerves, which I suspect was achieved.

Second, we need to understand that nothing is happening to Barclays Africa Group, other than its major shareholder announcing its plans to sell all or a part of its shares in the business.

Naturally, a major shareholder exiting any business will cause panic, but this exit has more to do with the challenges faced by Barclays Plc, regulatory and otherwise, than it has to do with us, the African countries.

Another impact the Barclays Plc exit may have on the African operations is a loss of the franchise and brand name, whose prestige has been enjoyed for almost 100 years on the continent. However, it’s too early in the game to speculate when this will happen, if at all.

What seems more certain is that the South Africa operation will retain its Absa brand. It appears that the “Barclay-rization ” of Absa will be averted. 

The brand has grown tremendously since the amalgamation of some of South Africa’s banks in 1991 creatively gave rise to the name Amalgamated Banks of South Africa, Absa.

So the English are going, Africa is not going to die, and South Africans can keep their Absa. However, another opportunity beckons.

For many years now, black business formations have been agitating for the creation of a black bank. Many have tried over the years, but due to various factors, including tighter regulation and the four-bank strategy of the central bank, it has proved difficult to achieve this.

Well, here is your chance, Black Business Council, Black Management Forum, Association of Black Securities and Investment Professionals, Association for the Advancement of Black Accountants of Southern Africa, et al.

An obvious partner would be the Public Investment Corporation, which could take a sizable stake in the bank and warehouse it for black investors.

Last year, a number of banking BEE deals matured, mostly at a profit for their investors, but nothing that resembles a black bank was created —although it’s worth noting the progressive strides being made by the likes of Nedbank in appointing black executives in key operational and strategic positions.

There is clearly an opportunity to do something transformative in the industry, with more than 60% equity of a large bank in Africa’s most developed economy suddenly available.

Hopefully, we won’t look back at this and lament the missed opportunity to move the needle in what has otherwise been sluggish economic transformation.

MINISTER WE WERE WILLING TO PAY MORE

This article first appeared in the Business Times section of The Sunday Times on 28 February 2016 

THE first time I saw the budget speech on Wednesday morning, I was convinced pages were missing. I did my usual quick squiz of the document and looked for the key big-ticket items I expected.

I found nothing, other than that fiscal discipline would come from curtailing the public sector wage bill. So I read the speech again, much slower. Still nothing. I picked up the Budget Review, all 235 pages of it, and paged through it carefully. That is when I realised that none of what I thought was going to happen, actually happened.

My biggest surprise was the decision to keep the marginal tax rate constant at 41%. It is no secret that the government needs to generate more revenue. Last year, we missed our projected tax revenue by R4-billion, which widened the budget deficit further than expected.

Due to slow economic growth, the 2016-17 fiscal year is likely to be a difficult one for individuals and companies. So collecting additional taxes from individuals who are losing jobs as the commodities slump persists and companies that are reporting lower profits is going to be difficult.

There is no doubt the fiscus need much more revenue than what the minister asked for this week.

I would suggest that, ironically, most South Africans were ready to play their part in ensuring our country navigates these difficult times.

South Africans, especially the high-income earners, were ready to come to the party, and an increase in the marginal tax rate would have been appropriate. Some may wonder why I would advocate paying more tax.

It is not because I enjoy paying tax. However, I am acutely aware of the challenges facing my country, and I would not hesitate to play my part, even if it means earning less.

I think many other South Africans feel the same way.

In the Budget Review I discovered an interesting table outlining the amounts of tax expected to be paid by individuals at different levels of taxable income for the 2016-17 year.

South Africa has 13.7 million individuals registered for income tax. Some 6.6 million, or 48% of them, don’t pay any tax as they earn less than R70 000 a year. That leaves 7.1 million taxpayers. Of these, 2.6 million earn less than R150 000.

If you earn anything more than R701 301 a year, you are in the highest tax bracket and are paying 41% tax on your earnings.

According to the Treasury, there are only 429 173 people who earn more than R750 000. That is 6% of the total population of taxpayers. This group pays 47% of the tax bill.

In this group of 429 173 there is a special group. They are the 94 578 who earn more than R1.5-million a year.

This crowd couldn’t fill FNB Stadium and represent a mere 1.3% of the taxpaying population, yet pay a whopping 23.5% of taxes collected.

Finance Minister Pravin Gordhan argues that an increase in VAT is inappropriate in these tough times because of the tax’s regressive nature.

Everyone, including the poor, would have to pay more for all “VATable supplies”, although one could soften the blow by extending the list of zero-rated items.

But why then increase the general fuel levy by 30c, or 11.6%? Why would it not be a regressive tax? The fuel price not only affects those who own cars, or use public transport. It affects the prices of all goods delivered and services rendered.

So why hike the fuel levy and leave the rich largely unscathed?

My basic mathematics tells me that the fiscus could’ve raised the R9.5-billion it plans to collect from the fuel levy by increasing the marginal tax rate by a mere 0.5%.

This would affect only 429 173 people, and it’s the very rich 94 578 FNB Stadium crowd that would pay most of this increase in any case.

The increase in transfer duty for properties valued at more than R10-million and the increase in capital gains tax inclusion rates are a slap on the wrist. By the Treasury’s own admission, they would collectively raise only R2-billion for the fiscus.

In his budget speech, Gordhan repeatedly highlighted the need for all South Africans to work together to navigate these challenging times. Even rich South Africans were ready to come to the party, and the minister didn’t take the opportunity.

When I consider the reality of an economy that will see only 0.9% growth this year, the words of former finance minister Nhlanhla Nene’s keep ringing in my ears.

“If we do not achieve growth, revenue will not increase. If revenue does not increase, expenditure cannot be expanded.”

An increase in the marginal tax rate was appropriate, Minister Gordhan.

HIGHVELD STEEL SAGA DRAWS TO A SORRY CLOSE

This article first appeared in the Business Times section of The Sunday Times on 21 February 2016 

THIS week’s news that eMalahleni-based Evraz Highveld Steel & Vanadium is considering liquidation and putting 2 187 jobs at risk was not only depressing but also highlights how global and domestic market dynamics impact the average Joe.

A perk of my work is disseminating what is often considered complicated and overly technical business news, in a manner that can be easily understood without dumbing it down.

The story of Highveld Steel is a sad opportunity for us to appreciate how market dynamics, and supply and demand, can shut down a market leader and put the man on the street, literally back on the streets.

In case you missed it, Highveld, once a doyen of South African industry, is facing liquidation mainly due to a glut caused by slowing global demand, which has resulted in cheap Chinese imports hitting our shores, making it near impossible to remain competitive.

This has led to parent company Evraz having to walk away from its investment and, more importantly, to 2 187 households losing their primary source of income.

According to its website, Highveld was established in 1957, when Minerals Engineering of Colorado built a plant in eMalahleni to produce 1.4 million kilograms of vanadium pentoxide a year. 

Two years later, Anglo American acquired a two-thirds share. In the early 1960s, another company, the Highveld Development Company, was established to investigate the viability of processing titaniferous magnetite ore for the production of liquid pig iron and vanadium-bearing slag.

The process to build an integrated iron and steelworks business started in 1964 and by June 1965, the company’s name had been changed to Highveld Steel and Vanadium.

A year later, Highveld was the global leader in vanadium production.

The next 30 years saw the company making acquisitions in companies producing manganese alloys, ferrosilicon, char, drums, pails, crown closures and stainless steel; as well as entering new markets in Austria, Japan and Spain.

Things looked up when in 2007, Luxembourg-based Evraz, one of the world’s largest vertically integrated steel and mining companies, completed its takeover of Highveld, by buying out Anglo American and Credit Suisse.

However, eight years later, in April 2015, the company went into business rescue after sustaining considerable losses for many years. Following lengthy consultations, over 90% of the company ’s independent creditors selected Hong Kong-based International Resources Ltd (IRL) as the preferred bidder for the business.

However, it wasn’t long until parent company Evraz approached the courts seeking to declare the business rescue plan of its South African subsidiary invalid.

Total creditors claims were R1.2-billion and IRL was offering a settlement of R380-million.

Clearly Evraz had done the calculations, and figured out that a shutdown of Highveld would be a better outcome than 31.67 cents in a rand and the rebirth of a competitor. Media reports at the time pointed to the possibility of Evraz standing to gain by letting Highveld go into liquidation.

“Evraz is one of the world’s largest producers of vanadium, and liquidating Highveld would take about 10% of supply out of the global value chain for the alloy, which is used in making products such as high-speed tools and jet engines. When Evraz bought Highveld it was forced by European Union competition authorities to divest of certain vanadium assets,” reported Business Day.

This opposition from Evraz eventually left Highveld in the lurch, forcing a production shutdown in July 2015, with no messiah in sight.

In October 2015, the company, in consultation with the unions, decided to apply for the Department of Labour’s training lay-off scheme, as a means to minimise the impact of retrenchments on employees. Instead of being retrenched, 600 employees would be trained in various skills and receive a cash stipend for six months.

The company’s application was approved on October 20, 2015 and training commenced on November 26, but the cash never came.

On February 8 the Department of Labour informed the company of its decision to “pause” its payment for the layoff scheme stipend, in response to the announcement that the IRL transaction had failed.

The company was forced to fork out millions, not budgeted for, to meet salaries for November and December 2015 and January 2016 — all during a time of zero production.

Without the funds from the lay-off scheme, and no IRL transaction, the company was forced to notify workers it wouldn’t be able to pay salaries at the end of this month — hence the possibility of liquidation.

The irony of all this is that Highveld is still South Africa’s second-largest steel producer.

The company has been a leading steel producer for more than 50 years and was ranked among 15 leading steel producers around the world.

When the country’s second largest steel producer is facing liquidation, it clearly spells disaster for South Africa’s steel industry as a whole. The government, through the International Trade Administration Commission, has tried to protect the industry by increasing the structural steel import duty.

However, it seems it’s all “too little, too late” for Highveld.

The company is now facing the end of the road and its 59- year history looks very likely to come to an end. Liquidation is by far the most likely outcome.

Creditors are likely to get nothing, given that the South African Revenue Service preferential claim stands at an estimated R550-million.

More importantly, though, all employees will immediately lose their jobs and receive no severance packages.

Rest in peace, Highveld. Condolences to the 2 187 families

THE REST IS UP TO YOU, PRAVIN!

This article first appeared in the Business Times section of The Sunday Times on 14 February 2016 

Watching President Jacob Zuma's state of the nation address this week reminded me of my favourite orator, Winston Churchill, who was once quoted as saying: "A good speech should be like a woman's skirt: long enough to cover the subject and short enough to create interest."

True to form, the president did speak for a very long time, even if you exclude the "points of order" preamble. Unfortunately, the demonstrations by the opposition parties have become the key attractions of the annual address, and have overshadowed the actual content delivered on the day. That speaks volumes about the real state of our nation.

When the "Honourable Speaker" eventually dealt with the EFF, Zuma proceeded to deliver what I thought was a long speech that didn't cover any real detail and certainly didn't create interest - at least not the detail and interest we needed.

A key precursor of Sona 2016 was a meeting between the president and the business community. Business has felt consistently left out by the government in policy and strategy formulation, especially as it relates to economic growth and transformation. Fair assertion or not, it is clear that South African business and politics have had an acrimonious relationship characterised by an elephant-sized trust deficit.

The CEOs apparently gave the president eight specific initiatives that can help the economy recover, and many of these were practical and measurable.

On the back of this, I hoped for a state of the nation address that would give some detail on the initiatives the government is considering to help ignite the economy and avert potentially crippling rating agency downgrades.

Excitement grew when I heard the president say: "A resilient and fast-growing economy is at the heart of our radical economic transformation agenda and the National Development Plan.

"When the economy grows fast it delivers jobs. Workers earn wages and businesses make profits. The tax base expands and allows government to increase the social wage and provide education, health, social grants, housing and free basic services - faster and in a more sustainable manner."

At this point I thought the president was preparing South Africans to understand and internalise the tough economic reality we are in.

I thought he would then follow up with something like "Compatriots, the opposite is also true. Without a fast-growing economy we cannot achieve radical economic transformation in the time frames we hope to. We cannot deliver the jobs we hope for. Workers cannot earn the wages they hope for and businesses will make less profit, some even losses; and the tax base will contract, making it difficult for government to sustainably deliver services."

But that didn't happen.

Instead, Zuma tried to give us a false sense of comfort.

After highlighting the challenges faced by the domestic economy, and the risks attached thereto, including the fact that the situation requires an effective turnaround plan from us, he said: "Our country remains an attractive investment destination. It may face challenges, but its positive attributes far outweigh those challenges. We must continue to market the country as a preferred destination for investments."

It was a missed opportunity.

It would have been beneficial to categorically state that 0.7% GDP growth is not an attractive investment return. We are not in a good space. On the face of it, and for some time to come, we are not an attractive investment destination.

However, the good news is that GDP growth rates are cyclical. We won't be here forever. We need to counter this slump with actions that quickly get us back to being attractive again. We need to highlight the long-term investment prospects of our country to investors, while showing empathy for the current poor performance of our economy.

This would have displayed much-needed empathy to an investment community that has more reason to exit its South African positions than to hold. C oming from our head of state, it would have gone a long way to reassure foreign direct investment cheque signatories that, notwithstanding the current economic slump, the government of South Africa is in tune with the realities and working hard to address them.

Another missed opportunity was Eskom. This state-owned enterprise has often been on the unfair side of criticism for the way it has reacted to the "energy crisis" that had grabbed the headlines. The headlines are no more. That is no coincidence. It is the fruit of hard toil by the company and its shareholder, the government.

Yes, the president did talk about the R83-billion invested and gave a short update on Ingula power station. However, he had an opportunity to pause and remind us all about the fears that existed just a year ago, and how the government got to work, put together a plan, and executed on it and now has actual results to show for its swift action. While still a work in progress, Eskom can be a very important case study that shows our capability in times of crisis.

But all is not lost. We have one more shot at this. Over to you, Minister Pravin Gordhan.