BLSA CEO’s Newsletter – 31 January 2022
POSTED ON: January 31, 2022 IN by Admin
The ANC lekgotla statement released last Sunday left me both in strong agreement but frustrated about solutions. The statement was absolutely right that unemployment of nearly 35%, and youth unemployment at 50%, is highly concerning. I’ve said many times that this is a crisis requiring dramatic action.
But the solutions left me frustrated. The statement calls for a “compact to decisively address unemployment and poverty”. The compact, according to the statement, would see all social partners make a “collective commitment” at all levels including small businesses involving “give and take” by all parties to “contribute to the cause of national development”. It says businesses will need to make “verifiable commitments to expand investment, and support localisation and black empowerment”. Somehow labour and communities would also “need to commit to improving levels of productivity, skills and entrepreneurship”.
Business is always happy to employ more people. Every business wants to grow. But we must be clear about the conditions under which businesses can employ more people, and I am afraid that the lekgotla statement displayed confusion about this.
Business is about generating profits. Saying this so starkly is overly simplistic of course. Businesses are lots of different things. They are embedded in communities and support the aspirations of many stakeholders from owners and customers to employees and their families. But when we think about how we should be incentivising business to achieve certain public policy objectives, we must be realistic. We cannot treat business as if it’s some single entity we can negotiate with and appeal to their social consciences. We must set up the environment such that we get the outcome we want.
Businesses do not invest because they have made commitments. There is no such thing – there are hundreds of thousands of informal and formal businesses in South Africa, many in fierce competition with each other. The only thing they can commit to – because it is implicit to being in business – is to try and survive and thrive as businesses.
We should instead be asking the real question: why is it that businesses are not investing, growing and employing more people?
The stark reality is that South African business is not nearly as profitable as it needs to be to grow. Statistics South Africa figures show that company profits collapsed in 2020, largely because of the pandemic. For the year, net profits were 86% lower than in 2019. This slump was somewhat understandable given the pandemic, but the longer-term trend is just as sobering – business profit margins have been falling since 2008. In 2019, after-tax profit margins across the economy were at 2%, reflecting a steady decline from 2008 when they were at 6%. 2020 will stand out in the record books – profit margins were only 0.3%.
This weak profitability has many consequences – businesses pay far less corporate tax, for one thing. But it also means they cannot invest. There are two reasons – without profits there are no savings to finance investment. But also, without profits there are no returns on that investment, so they can’t borrow to fund investment either.
This is the reality that I wished the ANC lekgotla had engaged with. If we are to address the unemployment crisis it has to be by changing the maths for business. They must see opportunities to generate returns that are commensurate with the risks they must take. It is only then that they will be willing to take on the risks of borrowing or investing their savings. It is only then that they will be able to grow and ultimately employ more people.
This cannot be achieved by compacting. It can only be achieved by seriously looking at the challenges businesses face in trying to generate profits – the high costs and unreliability of energy, the inefficiencies and costs of our ports and transport networks, the high cost of broadband and telecommunications, the quality of skills that employees bring from the education system, the safety and security situation businesses must operate in, the reliability of local government services.
There is much that can be done to address each of these and many other important issues. Organised business is certainly willing and able to engage with all social partners to find ways to do so. But this cannot be done through a compact based on impossible expectations of how business works. That will get us nowhere.
Nedlac is often perceived as the place where policy goes to get socially compacted to death but talks between social partners have been more energised since the onset of the Covid crisis and are producing results. I write in my fin24 column.
The World Economic Forum ranks the top five risks to SA as prolonged economic stagnation; employment and livelihood crises; state collapse; failure of public infrastructure; and proliferation of illicit economic activity. There’s no arguing with any of those but with the ANC elective conference scheduled for December, I’m concerned that the focus will be elsewhere. In politics, far too much damage can be done in such a long period, I write in Business Day.
This is a weekly newsletter from BLSA CEO Busi Mavuso.
BLSA is a business organisation that believes in South Africa’s future and shares the values set out in the Constitution. In 2017, BLSA signed a contract with South Africa, committing business to playing its part in creating a South Africa of increasing prosperity for all by harnessing the resources and capabilities of business in partnership with government and civil society to deliver economic growth, transformation and inclusion.
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