Paul Janisch

Leave the second economy to its own devices

John Kane-Berman wrote a very illuminating opinion in the Business Day on Thursday last week - No second-guessing value of informal job creation.  Government has always harboured an ambition to try and eliminate the second economy (aka the informal sector — officially defined as businesses that are not registered in any way).  However Deputy President, Phumzile Mlambo-Ngcuka is starting to realise that the formal sector (first economy) is not going to create the extra 2 million people that we need to reduce poverty by 50% in 2014.  She's not too put out by this because she reckons that we'll make this up in the second economy.  Kane-Berman's article questions the extent to which government should get involved in the second economy.

She's not the first person to see the value that the second economy brings to the economy.  Sithole Mbanga, of the South Africa Cities Network spoke of how necessary it was at the Hope Africa conference I attended last month. 

Kane-Berman lists a few features of the second economy:

• It currently accounts for some 2,9-million jobs
• Provides employment to (official statistic) 23% of the total workforce.
• The number of people in employment grew 834000, from March 2002 to March 2006. Many of these new jobs were informal jobs generated within the second economy.
• The informal economy is changing all the time. Cheap clothing imports from China have created opportunities for local hawkers (wonder what's going to happen here when the new tariffs kick in).

He also goes into a little detail on the casualisation of labour (a large percentage of these labourers form part of the second economy).  Casualisation, Kane-Berman argues, is the new face of labour in this country, with the number of casuals increasing by 63% in the last five years in the construction industry (as opposed to the 4% growth in formal employment in the same sector.)  These labourers are also beyond the reach of bargaining councils. 

With this new dynamic in the labour market, Kane-Berman cautions against regulating it in the way the government and certain other lobbyists are demanding. 

The government is relying on the informal sector to help meet its own job-creation targets. Logically, therefore, it can ill afford to do anything to jeopardise that sector’s job-creating potential.

He does acknowledge that some intervention is needed in order to elevate people from the second to the first economy which accounts for at least 90% of gross domestic product and three-quarters of employment.  One necessary intervention is to lift more of the compliance burden from small business, notably all the disincentives to the hiring of workers. With our levels of unemployment, these destroy opportunities for the poor.

He's not the first to note this - it's been uttered on many occasions for the last ten years.  The truth is "if you can't fire someone, then you will be a little reluctant to hire them."

She's not the first person to see the value that the second economy brings to the economy.  Sithole Mbanga, of the South Africa Cities Network spoke of how necessary it was at the Hope Africa conference I attended last month. 

Kane-Berman lists a few features of the second economy:

• It currently accounts for some 2,9-million jobs
• Provides employment to (official statistic) 23% of the total workforce.
• The number of people in employment grew 834000, from March 2002 to March 2006. Many of these new jobs were informal jobs generated within the second economy.
• The informal economy is changing all the time. Cheap clothing imports from China have created opportunities for local hawkers (wonder what's going to happen here when the new tariffs kick in).

He also goes into a little detail on the casualisation of labour (a large percentage of these labourers form part of the second economy).  Casualisation, Kane-Berman argues, is the new face of labour in this country, with the number of casuals increasing by 63% in the last five years in the construction industry (as opposed to the 4% growth in formal employment in the same sector.)  These labourers are also beyond the reach of bargaining councils. 

With this new dynamic in the labour market, Kane-Berman cautions against regulating it in the way the government and certain other lobbyists are demanding. 

The government is relying on the informal sector to help meet its own job-creation targets. Logically, therefore, it can ill afford to do anything to jeopardise that sector’s job-creating potential.

He does acknowledge that some intervention is needed in order to elevate people from the second to the first economy which accounts for at least 90% of gross domestic product and three-quarters of employment.  One necessary intervention is to lift more of the compliance burden from small business, notably all the disincentives to the hiring of workers. With our levels of unemployment, these destroy opportunities for the poor.

He's not the first to note this - it's been uttered on many occasions for the last ten years.  The truth is "if you can't fire someone, then you will be a little reluctant to hire them."

BIG hand-outs

John Kane-Berman provided an interesting statistic in his Business Day piece, on “discouraged workers” — those out of work and available for work, but making no effort to find work. Their number has grown from 2,2-million in 2000 to 3,7-million in 2006. 

All of these people will probably qualify for the basic income grant (BIG).  I would suggest that the implementation of a big will erode the incentive to find employment to almost nil.  Nazmeera Moola tackled the BIG in this week's FM.  Her biggest issue is how the government is going to foot this bill on a sustainable basis.  At the moment there is a budget surplus but what about the lean times?

Two solutions have been proposed:

1. Raise VAT by 7% - YOU'VE GOT BE KIDDING !!!!!!!!! (my emphasis).
2. Increase personal taxes by between 10 and 30%.  She speculates that this will have a detrimental effect on foreign investment. 

Moola writes very well, I recommend you read the article - A BIG question.

Unemployed graduates

What's wrong with this picture.  South Africa is so short of skills that they have to launch a whole new initiative (JIPSA) to address this problem.  Yet 200,000 tertiary-qualified individuals are unemployed.  A FinWeek report from 16 November, 2006 explains this anomaly.

A study from UCT's School of Economics found that 82% of these people hold diplomas and the balance degrees.  It also observed that the majority were black graduates.  The reason behind this is not as sinister as it may appear.  The report noted:

"African students or students studying at historically black institutions tend to graduate in fields of study with lower employment prospects, often because they don't meet the minimum requirements for enrolling in mathematics, science and engineering courses."   

FinWeek did however conclude that the study shows that very little seems to being done to improve mathematics and science education in SA. 

It's just occurred to me - the Reunert BEE deal is trying to do something about this. Boel told the Business Day, "Reunert realises how critical quality education in mathematics and science is for our own future and that of SA."   

Reunert deal (s)pending

Reunert is talking of doing a deal.  Well they have done a deal that is subject to shareholder approval.  But if they are making as big a deal about it, then they must be sure it is going to go through.  The 10% stake is estimated to be worth R1.1billion.  70% of the beneficiaries will be "students from previously disadvantaged communities who will get training in mathematics and science."

That's the nice, warm and fuzzy part of the deal.  The remain 30% goes to a new company called Retona, a SPV set up for the occasion.  Retona's shareholders are (wait for it), Dolly Mokgatle, Cheryl Carolus, Thandi Orleyn and Wendy Lucas-Bull - the head honchos of Peotona Group Holdings (Pty) Limited (Google them and see how many deals they've done in the last couple of years).  Boel Pretorius, CEO of Reunert defended his choice of partners (described as the usual faces) saying they had "chosen these women because it had faith in their ability to add value in the group."

And the structure of the deal.

1. A ten to eleven year lock-in clause, this after rumours that the codes will not look favourably on deals that lock investors in for longer than five years.
2. The deal is split between the four in this way:
   • Mokgatle (8.40%) amounting to R 92,400,000.00
   • Orleyn (8.40%) amounting to R 92,400,000.00
   • Carolus (8.70%) amounting to R 95,700,000.00
   • Lucas-Bull (4.50%) amounting to R 49,500,000.00

Poor old Wendy - she seems to have drawn the shortest stick here.  And this is a significant point - whilst the shareholders remain black then the deal works for Reunert, so they must be tied in.  All the best press in the world will never detract from that fact.  By the way - don't get too bogged down on the amount of money these people will earn - it is subject to the loan being paid off (otherwise they will be in a fair amount of trouble). 

Govt being BIG about social welfare

Hilary Joffe wrote a very balanced opinion on Skweyiya's basic income grant (BIG) in today's Business Day. 

She offers a few interesting stats on welfare.

• 18% of total government spending is spent on welfare,
• Nearly 11-million South Africans now receive pensions, disability, child support or foster-care grants.
• The spend amounts to R62bn, representing more than 3,5% of gross domestic product (GDP): an extraordinary ratio, even next to countries such as Brazil, which has something like a BIG.

She first tackles the positive aspects of a BIG.

Evidence shows how successful grants have been in narrowing the poverty gap, reaching deep into the poorest rural areas, where their impact has been significant. As small is the BIG is it would narrow the poverty gap and improve people’s life chances.

Her next step is to consider whether the BIG will actually solve the government's broader goal to fight poverty.  She suggests that a BIG does not address the problem but works around it.  Joffe suggests that the government's greatest responsibility is the "social wage"; a concept that takes education, sanitation and transport (et al) into account.  The BIG might direct government's attention away from the social wage and not address the root of the poverty problem. 

The next question is how is this BIG going to be paid for.  BIG proponents want the tax payer to foot the bill, and this would only be collected by raising taxes.  Raising taxes is not a popular option seeing that the tax to GDP ratio has increased 4% in the last five years (now sitting at 28%).

There must be a CSI tie in here - by creating a facility for companies to direct their spend at the poorest of the poor we will be alleviating some of the government's responsibilities.  And the benefit to the economy - new markets and consumers.

Another blog

I'm trying to get into the habit of putting our logo on each post.  Sometimes I get a little distracted and forget.  Whilst I am in a remembering frame of mind, the Caird Group has just launched its website,  it is a work-in-progress but Rienzo is getting better at the web mastering job.

There are a few BEE blogs out there, most of them are rubbish expounding naive and uninformed opinions that pander to the confused masses.  But there is one that is really worth looking at - it is maintained by Zainab Sarang and is called the BEE BLOG.  Subscribe to it - I did.

Getting a handle on the threshold

The rumours circulate and the press speculates as to the EME threshold.  I wrote about the Beeld and the R5million on the 15th of November.  The Herald Online has also picked up on the story.  The website is the virtual home of the the PE-based Herald and tends to report on regional issues.  The article on the delay of the codes discusses the impact on companies in the Eastern Cape (Confusion continues over new empowerment codes).  I like these kinds of articles because it does reflect issues that are prevalent to all small businesses in South Africa but that never seem to make the national business press.

The Herald's business editor, Johann Barnard lists a relevant statistic about the number of businesses that fall below the R5million mark:

According to the SA Revenue Service, it has 924 217 companies (excluding sole proprietorships) on its books. Of this number, 482 104 companies have turnover of less than R5-million a year.

He also makes the very valid point (that was stressed by Henk Koekemoer of BEEMatrix),

The problem with setting the threshold for compliance at R5-million is that this could effectively negate any of the intended advantages of broad-based black economic empowerment.

Food for thought indeed.

All you need is learning

The Reserve Bank published its Labour Market Frontiers report this week.  The Business Day reported today that the report found that "the higher the level of skills, the higher the monthly wages received by a worker".  The report also noted that "the earnings of unskilled and semi-skilled workers remained flat".       

The Global Entrepreneurship Monitor Download GEM2005.pdf came to a similar conclusion.  A summary of the report was published by Bizcommunity on the 23rd of April, 2006.  In effect the report found that:

Job creation potential is greatest in those with further education; individuals with tertiary education are 2.5 times more likely to start a business that their counterparts with secondary studies under their belt, and 11 times more likely than those without secondary schooling.

I think this must be a consideration when you devise your enterprise development strategy.Download the_caird_group_bee_code_600_entdev_analysis_october_061.pdf

What defines an EME?

It now seems to be common cause that the turnover threshold in determining an EME will be raised from the current R300k/annum (staff complement will in all likelihood be removed).  Speculation is rife as to what the new threshold will be. 

SABC News reported on Monday that it could go up to as much as R5 million (I got this information from Hennie Uys from BEEonline, thanks Hennie).  The guys from BEEMatrix told us that they had read in the Beeld that the threshold could be R5million.  The same article suggests that the dti has been listening to business as well in determining the new BEE targets!

Die aanduidings is dat die finale SEB-kodes heelwat voorstelle uit die sakesektor, soos dat klein ondernemings (omset van minder as R5 miljoen per jaar) heeltemal vrygestel word, gaan bevat.

We debated this threshold with Obed de Swardt and Henk Koekemoer of BEEMatrix at length on Friday afternoon - we all seem to agree that the R5million threshold is a touch high.  Perhaps it should be set at R2million.

Phuthuma not so nasty

It was bound to happen.   A re-visitation of BEE deals as soon the rumour of "once empowered, always empowered" hit the headlines.  We speculated about this in our Standard Bank post on the 6th of November.  Many deals hide behind liberal rhetoric of wanting to empower the masses etc, but these platitudes are more often than not a thin disguise for a BEE deal that will impress government.   Lock-in clauses are a perfect application of this principle - the deal is only worth something if the black shareholders remain shareholders for as long as possible.  Great for the company, not so good for the shareholder.  Can you imagine buying a house and the bank informs you that you may not sell the house for 20 years, or until the bond is fully paid off.

Fin24 posted a story on their website this morning that contemplates about how the "once empowered, always empowered" rule will impact on the two Naspers deals.  They suggest that it is possible that the sale-to-black-people-only condition will be removed if the rule does form part of the codes. 

I love this principle - it works for all parties concerned.

By the way - both schemes attracted an incredible amount of interest.  The Welkom Yizani (Media 24) share offer was more than 200% oversubscribed by black individual applicants alone, and the Phuthuma Nathi (Multichoice) share offer was 190% oversubscribed.