SaveSA and its coterie of ambivalent corporate social activists have done a good job of destroying former Finance Minister Pravin Gordhan, now let us watch them try the same thing with his replacement, Malusi Gigaba.
On 17 December 1974, one of South Africa’s most successful women – Khanyi Dhlomo – was born in Durban. A few months later, in the winter of 1975, a young man named Lawrence Summers graduated with an undergraduate economics degree at MIT. In that same year, the US Securities and Exchange Commission classified 3 entities as ‘nationally recognised statistical rating organizations’. These 3 entities – Fitch, Moody’s and Standard & Poor (S & P) were responsible for providing ratings to the majority of the companies in the United States. Up until that stage, the relevance and credibility of the ratings agencies had been driven by the accuracy of their opinions.
However, in the cruel alchemy of policy making and political blunders, the decision in 1975 to designate these 3 agencies as the primary players in the ratings market, had the unintended consequence of shifting the source of power that the agencies enjoy. After the agencies obtained the classification from the SEC, financial regulators then developed a habit of drafting various laws that put the ratings agencies at the center of the business of finance. This means that the agencies as we know them now derive their power and influence not from the quality and accuracy of what they say; but rather from the fact that all forms of market regulation have told us that the ratings are important.
Over the past 42 years, the trajectories of the lives of Larry Summers and Khanyi Dhlomo have mirrored the shifting tides of human progress. Dhlomo was born into a country that was deeply hamstrung by international sanctions and had no access to capital markets. Hers of course was no ordinary life. Her father, the eminent Oscar Dhlomo, was one of the leading political intellectuals of his time. By the time she turned 20 years old, she was parachuted into the national consciousness as the youngest and most elegant of all TV anchors. That coincided with the official end of the apartheid government and the end of all forms of sanctions against South Africa. As the anchor on the SABC, Dhlomo was intimately engaged with the fundamental shifts of the South African story; and has remained so ever since.
Summers on the other hand, had a most glorious career in academia and public office. Having acquired his PhD in 1982, he became the first MIT graduate in over 130 years to be appointed as President of Harvard University in 2001. But before his elevation to Harvard, he served as finance minister in the Clinton government and created all the regulations that led us to the financial crisis. When he was the President of Harvard University, its famous business school accepted an application from a young Dhlomo who was accepted into the MBA programme in 2005. That is probably the first time that the paths of the two could be said to have intersected.
Last month, Oxford Business School hosted Dhlomo and Summers within a week of each other. On the 11th of March 2017, Dhlomo delivered the keynote address at the Africa Conference at Oxford’s famous Nelson Mandela Theatre. The title of her address was “When two elephants fight; it is the grass that gets trampled.” In light of the recent developments in our political landscape; this title seems particularly appropriate.
A week later, I attended Summers’s lecture at the same venue. After an hour of deliberations with the economics guru; what stood out is how he addressed a question relating to ‘Brexit and Trump’. In analysing why Brexit and the rise of Donald Trump happened, Summers explained that the problem must be laid at the door of the political elites who care more about Davos and the global poor rather than the fate of their own people. In essence, Summers argues that political leaders across the world have relegated issues of human interest into 2 extremes – issues specific to themselves and the global poor. The elitist extreme focuses on being able to formulate policy and regulations that speak to the primary obsessions of the Davos elite – globalisation and control of the world financial markets. The Davos elite essentially refers to those fortunate enough to attend the annual World Economic Forum orgy every year in Davos. Founded in 1971, the forum is the brainchild of one Klaus Schwab whose only conviction in life is that globalisation will solve all our problems.
As a mendacious defender of globalisation, Schwab has always gone to great lengths to promote globalisation as a religion and uses the annual Davos jamboree as the main event. The problem with things like globalisation is that those who believe in it – and there are a lot – share the view that in the pursuit of the globalisation agenda; all rules relating to individual states should be sacrificed in favour of something aligned with the Davos mandate. At the same time, the various players in the Davos group like to refer to their efforts at solving the issues of the global poor. In other words, they are likely to talk about how their policies will lift the slums of Mumbai and the favellas of Rio out of poverty through globalisation. The odd nature of such policies is that they are anecdotal rather than factual. So the Davos elites really believe that if they are better off then somehow through some magical process, the poor in Mumbai or Rio will also somehow be better off. And they don’t actually have to prove this.
South Africa’s regular crowd at Davos – the Finance Minister and the army of capitalists known as Save South Africa; are the most obvious example of this problem. Absent when students march against injustices. Indifferent when service delivery collapses. Silent when bank collusion is brought to the fore. But vocal when the President’s shenanigans threaten the currency – because it suddenly has an impact on their assets.
What unites the various players in the Davos group is that all of their efforts seem to neglect one particular constituency – the poor and the middle class in their own countries. In pursuit of the Davos agenda, the political and business elites find it easier to eliminate tariffs in order to remain in the good books of the Davos masters – never mind the impact on their own communities.
In Summers’s analysis, it is this idea of elitism and objectifying the global poor that led people to vote for Brexit and Trump.
As Summers narrated his story, I found myself trying to assess whether such an analysis could be relevant in South Africa. In other words, do we as a country suffer from an unhealthy obsession with the views of the world’s elite rather than addressing the material conditions of our people? And if we do – what led us to that dilemma?
And then I remembered that 2 months ago; a dozen chicken farms were closed in KZN as they could no longer compete with the foreign imports. A way to solve this, would have been implementing tariffs for that industry in order to preserve those jobs. But South Africa’s fiscal policy is deeply aligned to the Davos agenda so such a course of action was not even contemplated. This kept us in line with the Davos insiders; and condemned thousands of black workers to permanent unemployment.
And naturally the events of last week’s reshuffle had a profound impact on my reflections on the Larry Summers lecture. Essentially for over a year we have been caught in the dark side of a bizarre bromance between the Finance Minister and the President. To trace the story back to inception; we need to remember the events of December 2015 when Nhlanhla Nene was booted out of National Treasury by the President. In the aftermath of appointing Des van Rooyen as the Finance Minister, President Zuma was forced into a humiliating and very public defeat where he had to install Pravin Gordhan as the Finance Minister. Key to this process were the banking sector and senior business leaders in South Africa. I am one of those who found the entire episode slightly concerning.
Because in the middle of the hysteria around our politics, we tend to ignore addressing fundamental issues in favour of cosmetic PR exercises. The reality of the Gordhan elevation is that the President did not appoint him as the Finance Minister – but he was forced to install him as a compromise aimed at appeasing the international markets. This was problematic not because Gordhan is bad at what he does – he is actually quite good – but because the essence of the terms of engagement between him and his employer were compromised from the outset. It is not Gordhan’s primary instinct to be rebellious – in fact part of his problem is just how committed he is to the ANC. And yet in a process where the Minister felt that he had bailed out the President from his own cock-up, there was always the looming hint of invincibility on the part of the Minister. Such a state of affairs created the Icarus complex in the relationship between the two The Minister could – unlike other Ministers in the cabinet – utilise his social currency to position himself as the lone voice of reason within a rapidly disintegrating administration.
For the President on the other side, such a relationship always carried the risk of defiance. Not because Gordhan is defiant in nature but because his very presence in the Ministry implied that he had the buy-in from society and the markets. In the President’s mind then, such a state of affairs bred hints of paranoia centred around the idea that Gordhan might just see society and the markets as the people he needed to report to rather than the President. And given the fact that out of 55 million citizens, clearly not a single human being understands how the President thinks anyway, we were always exposed to the risk that the President’s own interpretation of the state of affairs would facilitate a fatal breakdown in relations.
The impact of structures like SaveSA is that they really stepped into the fragile relationship between an employer and his employee; and spent more time pissing-off the employer by elevating the employee into a cult superhero. This could never end well.
I was at the Sandton Convention Centre last year when the Finance Minister was bizarrely given the Business Leader of the Year award at the Sunday Times banquet. I knew right then that his was a path to self-destruction. And so the issue of Gordhan getting fired is not so much a question of why it happened but how it took so long for it to happen.
Within the continuum of negotiated political settlements, there is a need to avoid public humiliations across the board. But in December 2015 the reality of the social elites that have now grown into something called SaveSA is that they engineered a very public humiliation of the President. And not only was that humiliation played out in a public arena; it then gained momentum through various structures whose valid concerns about the state of the nation were simply interpreted by the President as ongoing public humiliations supported by Gordhan. And the fact that at every juncture, such structures would praise and elevate the Finance Minister, only served to widen the gulf between the President and the Minister. And yet – through it all; Pravin remained complicit in the political shenanigans of the government.
The reality is that even at this stage where Pravin has been dismissed he actually maintains a loyalty to the ANC first and foremost rather than to society. The key issues that led to his dismissal apparently relate to the question of the nuclear deal and the disastrous condition of state enterprises. It is possible that the cabinet had decided at some point in time to commit to a nuclear deal we clearly cannot afford. If that is the case; then the Finance Minister who refuses to sign off on this deal is doing us all a favour. If Gordhan has been the one refusing to make it happen even though the President wants it; then we must be grateful to Gordhan. Except of course we have no idea whether any of this is true.
The reality is that if Gordhan regarded society as the place where his accountability lies then he could have told us that ‘Yes, I’ve been asked to sign off on an unaffordable deal and I refused to do so’. That would make us all understand what the breaking point was in his relationship with the President. But he has done no such thing. So all we have is a coterie of those ambivalent nation builders – SaveSA – rallying about a matter that would be easy for all of us to buy into if Gordhan took us into his confidence. One can assume that his reluctance to ‘throw the President under the bus’ is linked to his enduring belief that the ANC issues are far more important that the country’s issues – and we need to call him out for this.
Similarly with all the hysteria around the Guptas, Gordhan is the one man who has been in the unique position of being able to access all the information relating to their suspicious deals and tell us exactly how dangerous the Guptas are to you and I. And yet no such information has been made available to us. And surely in an environment where Gordhan has been ejected from the President’s inner circle then he has nothing to lose by telling us exactly what’s going on? So unfortunately until Mr Gordhan is ready to put his head on the line and inform us all about just how captured our state is we actually don’t know what we are mobilizing for. All he has given us is a series of anecdotal hints which cannot really be used to mobilize society. This is difficult to explain.
And let’s face it; all of this is of course linked to the reality that even though the President showed us in 2015 that he has the ability to abuse his ‘prerogative’ in appointing Ministers we never confronted this particular weakness in our Constitutional architecture. Rather we engaged in a very public social project of humiliating the President instead. Sadly – this is the price we are now paying today for failing to address the structural problems in the system of electing members of cabinet. The President – being who he is – decided to pull a Thabo Mbeki and engineered a very public humiliation of Gordhan by essentially firing him via an SMS in the full glare of the entire world. It was petty, brutal, vicious and unpresidential in equal measure. But that is the President we voted into power – twice.
As we now know; the very sartorially-fixated Malusi Nkanyezi Gigaba is now the finance minister. The problem is that we all have a suspicion that his transition is a consequence of political accidents rather than a meritorious elevation into the Finance Ministry. The difficult part is that in focusing on the hysteria of how he ended up there we will – yet again – fail to neutralize the president’s potential abuse of power by not crafting a roadmap on how we really want to evaluate the performance of our Finance Ministers. It might turn out that Gigaba might be the best Finance Minister we will ever have but the history of his elevation will always overshadow anything he achieves.
In the absence any objective indicators that can be used to explain to the President whether he is wrong or right in changing ministers we would have failed Gigaba and Malusi as those civil servants brave enough to take on the job. We would have failed the President by failing to provide him with a set of tangible parameters that we can legitimately use to say whether he is wrong or right. We would have failed ourselves by failing to appreciate that we are all complicit in the current crisis through our participation of public humiliation of a President who clearly doesn’t give a damn anymore. This is where things like Save SA indicate how profoundly clueless they are about the attrition inherent in politics.
The basic rules of engagement dictate that the finance minister’s effectiveness should really be assessed on the basis of how he uses available policy instruments to facilitate the creation of a robust, inclusive and expanding economy. Any finance minister who is unable to meet such indicators needs to be marked down.
So then let us conduct an objective evaluation of Pravin Gordhan’s achievements as the Finance Minister. And given the complexity of the South African problem; it is perhaps instructive to focus on a few indicators that are easy to assess.
The state’s primary responsibility is to collect sufficient revenues in order to fund its commitments towards society. In this case, the finance minister becomes the custodian of various policy and regulatory instruments aimed at achieving this balance. If we fail to grow the economy or collect sufficient revenues to run the state then we either have weak or dysfunctional policy instruments or a less than effective finance ministry. And if it turns out that our financial system is subject to leakages that compromise the state’s ability to collect revenues then again we need to question existing policy instruments or the custodian of such policies. It is common cause (a known fact) that South Africa’s economy is in a state of terminal decline.
It is also common cause that the tax receipts in the current climate fall short of what we need in order to run the state. As someone who has been writing textbooks on Income Tax and Financial Accounting since I was 20 years old; I have been witness to some of the more extraordinary developments in the design of our tax system over the past decade. Two in particular that puzzle me, relate to the tax treatment of medical costs for individual taxpayers and the direction of corporate income taxes in South Africa.
The ability to afford medical aid and access private hospitals in South Africa remains a privilege for very few people. Those who are in a position to afford such luxuries are essentially buying their way into a better life and the rest of us are subjected to the whims of a dysfunctional public health system. The way the tax system has been designed is that it has unique benefits that accrue to those who are part of this parallel society of private healthcare. Every year; taxpayers who are members of such schemes have to provide data relating to how much they paid into medical aid funds and how they used such medical aid benefits. In completing their tax return, there are 2 questions that need to be asked.
The first one (section 6A of the Income Tax Act) – simply asks whether you are a member of a medical aid. And if the answer is yes, then you as an individual taxpayer get allocated a deduction which reduces the tax you need to pay. After that, there is a secondary question which his referred to as the medical scheme rebate. In this question, the state is simply asking whether you as a taxpayer paid more than
7,5% of your taxable income towards healthcare costs. And if you did, then the state has to give you another deduction of all amounts above the 7,5% mark. After that SARS publishes a summary of all these deductions and indicates how much tax was sacrificed by the state through this system. In 2012, the value sacrificed by the state through the medical aid deduction system was R60 billion. Had such a deduction system not existed then the state could have levied income tax on an additional R60 billion in revenue – just for that year.
The problem with this model is that individuals who are in possession of medical aid are more likely to use private hospitals – Netcare, Mediclinic and Life Healthcare. The very essence of being on medical aid is that you can opt out of Baragwanath and let the poor use that facility. However, something strange tends to happen in this system. Every year the medical aids – led by Discovery – publish their list of tariffs that they charge to their members. And on average, such increases are always much higher than inflation. The medical aids cite the rising cost of healthcare – in other words, what the hospital groups charge – as the reason for these increases. So back in January this year; I interviewed 15 clever blacks and asked them to cite their top 3 reasons for being on medical aid. Of the 15; not a single one mentioned the tax benefits as the reason for being on medical aid. So you need to think about that for a moment.
Our tax policy is designed to offer tax incentives for people on medical aid and yet none of these beneficiaries seem to list that as a reason for being on medical aid. Our tax policy is designed to ensure that if one wants to benefit from this medical deduction system; then they need to answer 2 discrete questions – are you a member of a medical aid and did you spend more than 7,5% of your taxable income on medical expenses. If you are able to answer these 2 questions; then we give you a deduction in your taxes. According to the SARS tax statistics; the value of medical deductions granted to taxpayers between 2011 and 2014 amounted to 156 billion rand.
The issue is not that an amount of R156 billion has been sacrificed by the state. The issue is that the 2 questions that are asked by the state in deciding to grant the deduction are unique to a particular class of South Africans – people who are members of medical aids and people who have something referred to as taxable income. The 17 million SASSA beneficiaries have no ability to answer such questions. Only 10,5% of black South Africans have medical aid. 73% of white South Africans are on medical aid. The black youth that has a 40% unemployment rate has no ability to answer such questions. So the question is how did we ever end up with such tax policies? Who do they seek to serve?
The great sense of discomfort I have with the medical aid fiasco is the reality of where the money ends up. Having established that no one signs up for a medical aid because of the tax benefits but for the convenience associated with being a social elite; I then tried to trace the flow of funds through this system. And it really appears that the best way to understand this problem is to narrow the conversation into the 5 companies at the heart of the cash flows. Those would be the 2 medical aid groups – Discovery and Momentum; and the 3 private hospital groups – Life, Mediclinic and Netcare.
When these medical aid companies decide on increases to be charged to their clients they have an awareness that there will be tax benefits allocated to the taxpayers. So perhaps in formulating their prices Discovery simply estimates the highest tariff increase it could implement without scaring off the customer – and that is how they get away with their ridiculous increases. And in a system where the state is an active participant in this rebate system you really end up with the state sacrificing R60 billion in possible tax receipts; Discovery increasing its charges and passing the benefit to Mediclinic. At the end of it all – the sum of profits earned by the medical aid schemes and the private hospitals is directly linked to the billions that have been sacrificed by the state. Billions that could have been redirected towards services for the poor.
Go on – add up the profits declared by just these 5 companies in 2016 and then ask yourself whether they would be able to generate such profits if our tax regime wasn’t so perversely structured.
The key issue is not that I have a thing against private healthcare – far from it. The thing to which I object is the creation of a tax policy that forces the state to sacrifice R60 billion which ends up being recycled into the profits of these big 5 companies. I have an objection to a state that doesn’t have enough money to provide medical supplies in Baragwanath Hospital and still finding a way to pass on benefits of up to R60 billion to the social elites; the medical aid groups and the private hospitals. That is something I am uncomfortable with.
The other glaring exhibit of the weakness in our tax system relates to the taxes collected from corporates. It is common cause that over the past 10 years; there has been a steady decline in corporate taxes. A useful tool to establish whether corporates pay their fair share of taxes is to use the ‘effective tax rate’ for each entity. Essentially it measures the ratio between the taxable profits of an entity and its final tax liability. If the effective tax rate turns out to be much lower than expected; then it means that either companies are smart enough to reduce their taxes or that our tax policy is weak enough to enable them to pay less than their fair share. In 2008, the effective tax rate for corporates was 34,55%. Today it is down to 28%. The reason behind this is that the secondary tax on companies was abolished in favour of a dividends tax system which unfortunately leads to lower tax receipts.
For a developing state there is something profoundly disturbing about this trend as this inevitably leads to a decline in state revenues. And these are just 2 examples of how poorly executed our tax policy has been over the past 10 years. So when Pravin went to Parliament last month and explained that the incompetence of Tom Moyane has contributed to a R30 billion gap in tax revenues, my first question was simply this – ‘But didn’t Pravin oversee and champion the tax policies that have led to this decline in tax collections?’
The lack of economic growth is really core to the essence of the South African problem. The global financial crisis was 9 years ago. And the countries affected by it have found a way to move on from it and revive their economies. South Africa has not been able to do so. This needs to be explained by those in charge. A new way of conceptualising how our fiscal policy is executed and implemented is overdue. We simply cannot keep referring to a bygone crisis as the reason we are not progressing. And perhaps the way to unlocking that progress is to bring in new voices into the conversation. This is the state in which we find ourselves.
TWELVE hours after Gigaba was appointed finance minister; the first ratings agency informed him that they would be downgrading South Africa’s foreign currency rating. In other words; if South Africa wishes to borrow money overseas they are likely to pay more in interest as the junk rating means that South Africa is expected to struggle to pay its debts. Only 10% of our borrowings are sourced from such markets. To make sense of this, one has to assume that S&P has managed to calculate that our tax receipts in the future will be much lower and the first thing we will do is refuse to pay our interest obligations.
Alternatively it could mean that our National Treasury will be radical enough to redirect all state revenues towards Saxonwold from now on. However, if any such possibility materialises it would unfortunately be a reflection of the policies adopted over the past 10 years rather than anything Gigaba might threaten to do. And if one has to be objective – unlike the ratings agencies obviously – the conditions necessary for a downgrade have been in existence for the past 18 months at least. Quite exactly why the agencies did not deem those poor indicators sufficient to impose a downgrade remains unexplained. In the case where they cite ‘political risk’ as the reason there is an extraordinary level of hypocrisy attached to that. The essence of policy formulation in South Africa is painfully slow – and hence no radical change in policy can be conceptualised, drafted and implemented before 2019.
What is really curious about the ratings agencies is their extraordinary levels of inconsistency. The one ratings agency that has downgraded South Africa has a slightly different business model to the other 2. S & P distinguishes between local and foreign debt. It is only the foreign debt that they have downgraded. And that is only 10% of our exposure. S & P itself indicates that our local side of the transaction remains investment grade (with a negative outlook). The other 2 agencies do not split the exposure into local and foreign. So if they decide to downgrade South Africa they will be downgrading the local and foreign exposure – which means they will be disagreeing with S & P on the local exposure. In other words, these things are still a question of subjective sentiments rather than a true assessment of the state of affairs. Whether we are comfortable with the idea of ratings agencies influencing political processes is something we need to deliberate on.
No other man in the global financial world has undergone more evolutions than Summers. As the head of finance under the Clinton administration; Summers championed globalisation and believed in the relevance of ratings agencies. When I saw him last month at Oxford he was a man far removed from the guy who was scandalously dismissed from Harvard University in 2006. He is now a man who appreciates intimately that the role of the Davos class in manipulating the world in order to favour the elite has lost relevance – except perhaps in South Africa. It is the Davos elite that encouraged us to shift our corporate tax base from 34,5% to 28%. It is the same Davos elite that advocates for ratings agencies to be used in spite of their lack of credibility. And it is this Davos elite that Pravin was meeting in London last week when that fateful SMS was delivered to his inbox.
The reality of our situation is that the downgrade should have happened long ago; all that delayed it was the sheer force of Gordhan’s personality rather than his competence. Because as soon as he left the door, the downgrade was effected which unfortunately implies that he failed to develop and create a robust finance ministry during his time in Church Street since 2009. Having met him and grown to appreciate how passionate and committed a civil servant he has been it is a terrible indictment on our political structure that we have ended up in this mess.
The unfortunate reality is that such things remain embedded in the architecture of our financial system. All our pension funds and investment funds still believe in the ratings agencies. In this drama, ordinary South Africans find themselves at the center of this fiasco.
On the one hand you have the Save SA brigade who have been jolted into action because finally the impact of the President’s indiscretions is about to affect their offshore portfolios and on the other hand, the millions of the marginalized who have been bearing the brunt of corruption and maladministration for years.
On the one hand we have the ratings agencies threatening to increase our cost of borrowings and on the other hand, a society made of the poor and marginalized who will eventually feel the effect of such actions.
On the one hand we have a President whose capacity to give a damn has clearly disappeared; on the other hand we have a finance minister who has spent the past 8 years presiding over a dead economy and the most disastrous tax policy that any developing country could have.
On the one hand we have a President who is viewed as a living monument to incompetence; and on the other hand a dismissed minister who is the superhero of the elite. Through it all, we as society are the unwilling pawns in a game of chaos. Save SA and its associates has played a major role in facilitating the demise of Pravin Gordhan through completely isolating him from his employer without planning for the inevitable chaos – and they need to account for this. By their own admission, the ratings downgrade was triggered by Gordhan’s exit from Treasury – and their actions had a massive impact on this exit. At no point in time has Save SA taken the time to ask Gordhan to explain how exactly he ended up running a ministry whose entire fate depends on the existence or otherwise of one human being – himself. Where is the robust system that we all thought the Treasury represented? If we don’t ask them to do so, they might try to do the same with Gigaba?
As painful as the downgrade might be it now gives us the latitude to confront the systems we have and decide whether the Davos compact we seem to be so obsessed with is actually relevant to the masses of the poor and marginalized in South Africa. That is what Save SA should be offering us as society.
Pravin Gordhan could still live up to his hero status. One of these days, there will be a Parliamentary debate regarding the fitness of the President to hold office. At the end of it there will be a vote. As an MP, the former finance minister has the right to participate in this vote. And he has the ability to vote for the dismissal of the President. If he does so, then his hero status would be validated and confirmed. But I suspect that we will see no such action. He might not even be in Parliament that day. And that will remind us all that he is in actual fact, firstly a politician rather than a superhero. And then we would have to ask ourselves how we keep refusing to understand that politics is just that; and a certain Jacob from Nkandla is the mastermind of it all.
As Khanyi Dhlomo said last month at Oxford; when two elephants fight it is the grass that suffers…