How to state-proof your business

Speaking notes for IRR CEO’s Frans Cronje’s address to Afrisake, 5th June 2018

Ladies and gentlemen, good morning. It is always a privilege to be asked to address your members.

You are fortunate to have someone of the calibre of Piet le Roux as your relatively new CEO. Piet has an extraordinarily well-honed sense of what is happening in our country and a deep commitment to making it a success. With him you are in very good hands indeed.

You can see that in the subject of today’s meeting and in what he has asked me to address you on – how to state-proof your business. I don’t have all the answers, but I think I understand many of the threats, so I will start with these and then move onto some of the strategies you might pursue – strategies that will extend beyond your immediate business and to your family, as the two are often closely intertwined.

So where do the threats to you as a business owner or entrepreneur originate? There are five areas:

Threat 1: The ruling party and its NDR ideology

The first is the ruling party, and the threat rests in the main in its formative ideology. The political ideology of the ruling party is underpinned by the theory of National Democratic Revolution (NDR). The theory draws on Lenin’s theory of imperialism – that the wealth of colonial powers only arose through the exploitation of the colonised and is therefore inherently illegitimate. In South Africa, the African National Congress (ANC) adapted the theory for what it calls colonialism of a special type – the special type being that, unlike in many other parts of the world, the coloniser has become a permanent part of the society and may never go ‘home’.

The purpose of the NDR is to dispossess the coloniser of his wealth and of everything that flows from it – his education, living standards, home, property and opportunities for advancement. Until that has occurred, the theory holds, the revolution can never be complete.

The ANC has recommitted itself the NDR at several junctures since 1994. The party has, however, long understood that to simply seize the capitalist economy and destroy it would trigger a chain of negative consequences sufficient to destroy the revolution. The purpose is rather to “harness the capitalist economy to the revolutionary agenda of the state”.

This is a slow and incremental process of using regulations, legislation, and state power to extract wealth from the middle classes and the business community. Mining policy, BEE policy, land reform policy, NHI policy, and policy on water rights are all examples – and we will get back to them. As my colleague, Russel Lamberti, who is here today observed last year, the purpose is not to seize the means of production as much as to regulate those means to the advantage of the state.

The brilliance of NDR theory is that where any opposition is voiced to the negative consequences of these statist and redistributionist policies, the person or group voicing those objections is accused of wishing to defend the illegitimate status quo, one established during the colonial era, which by extension means that the critic must be a racist meaning that his or her views are inherently illegitimate. To question the policy at all is itself evidence of the crime and therefore the damaging effects of the policy never receive sufficient scrutiny.

The theory of NDR seems set to remain the formative ideology of the ruling party for the next decade and overcoming its consequences must be your chief strategic objective.  

Threat 2: The Democratic Alliance

Do not delude yourselves about where the Democratic Alliance (DA) now stands. It is ever less an organisation that has your interests as entrepreneurs and business people at heart. There are good people in the party and they are doing their best, but it would be misleading to tell you anything other than that they are losing ground every day to racial nationalist factions whose formative ideology is no different from that of the ANC.

This has been a long time coming and at times the party has sought to conceal the rifts, but they are now out in the open and it is plain to all but the most naïve of observers that the balance of power in that party has shifted.

We saw this some years back when the DA caucus sought to support the ANC’s attempts to introduce more stringent employment equity legislation – a crisis that forced the party’s then leader, Helen Zille, to intervene to avert what she warned could be a ‘plane crash’.

We saw it when Mmusi Maimane, also some years back, committed the party to narrow raced-based empowerment policy at odds with his then senior colleagues, triggering an internal party rift that spilled over into the media.    

We saw it when the DA suggested that it would introduce racial quotas for its branches.

At each point, and there were many others, when the DA was challenged, especially in the press, it stepped back and insisted that its policy drift was being misrepresented or misunderstood. It was not going to force quotas like the ANC does – it was rather going to pursue diversity. It would not allow its employment equity laws to be used to promote corruption as the ANC did – it would enforce them more effectively. It was not going to use the ANC’s BEE scorecard – it would develop a better one.

If there was any doubt about where the party is headed the recent dispute about the idea of white privilege should win over even the sceptics.

In a speech last month, Mr Maimane said the DA would fight white privilege. It has been suggested that he might not have fully understood what he was committing his party to, but I have no doubt that his advisers know exactly what the term means in the South African context.

White privilege means that the mere fact of your race determines that you receive undeserved social and economic benefits within the society. Those benefits allow you to be educated, pursue your career or run your business, and you only receive those benefits because of South Africa’s colonial and racist past. Worse is that your receipt of those benefits not only causes you to prosper but is the reason why black people are poor, unemployed and badly educated. Your whole life is simply a reflection of the racist past made worse for the fact that your prosperity is the continuing cause of black poverty. It must follow that the role of the state is to intervene to ‘confront white privilege’ as Mr Maimane said.

If you see a parallel between white privilege theory and the theory of NDR that is because they are essentially interchangeable concepts – that, in plainer language, both can be reduced to old-fashioned socialist dogma.

How did the DA respond to the criticism it faced around its commitment to fight white privilege?  

Well, the leader of the party in the Eastern Cape said:

“Apartheid was a system designed to benefit white South Africans and disadvantage black South Africans. The privilege associated with that system lives on and can never be denied or be swept under the carpet. I therefore agree with the DA’s Federal Leader Mmusi Maimane when he says that the time has come for South Africans to confront ‘white privilege and black poverty’.”

Confronting black poverty, or poverty regardless of race, is what politicians should do. But you do that by creating good schools, providing sound infrastructure, and attracting investment to grow the economy and create jobs. There is no other way. Confronting white privilege, let alone allowing the state to intervene in the education, lives, and businesses of white people achieves absolutely nothing other than making the whole society poorer.

The point is that if I am right that DA has crossed the point of no return in terms of adopting what is in essence the formative ideology of the ANC then you must expect that, where it governs or has influence over policy, it too will campaign to give the state greater power to intervene in your business.

Threat 3: Big business

The third area of risk you face is from big organised business. The South African economy is strewn with large corporate monopolies. They use their financial muscle and proximity to political leaders to craft policies that make it very difficult for smaller firms or start-ups to compete against them.  

BEE agreements, minimum wage laws, and the horizontal application of bargaining council agreements are all examples.

You will seldom hear a senior organised business executive criticise any of these polices for two reasons:

The first is that they don’t want to compromise their access to ruling party politicians.

The second is that large firms can more easily afford the costs that attach to these policies than small firms. The large firms have the capital, balance sheets, and administrative resources to absorb these costs or pass them to consumers – something that is not true for smaller firms or start-ups. By forcing the smaller firms to exist under the same regulatory framework large organised business is able to reduce those firms’ competitiveness and push them out of the market.  

Very often organised business has been an active participant in advocating for laws and policies that make it difficult for smaller firms to emerge. Do not think therefore that you have allies in big business. You are on your own and if they can screw you over, or get the politicians to do it for them, they will.

Threat 4: Parts of the media and social media

The fourth threat you face is from the mainstream media and social media.

Because of the grip that dogmatic socialist thinking has on the country, what you do is not appreciated or valued particularly highly in the realm of popular opinion.

People who create jobs are often presented as exploitative – that they refuse to pay decent wages or provide their staff with support and services. There are powerful lobbies that seek to discredit your efforts to create opportunities for the unemployed and this will continue to remain the case. When destructive trade unions turn on you or social justice activists challenge you in newspapers, do not expect much by way of sympathy or that any group (other than ourselves, Afrisake, and perhaps a handful of others) will make a case in your defence.  

Likewise, entrepreneurs who provide capital to the country are seen as greedy and exploitative. They stand accused of refusing to share their wealth and of focussing instead on making profits and a range of other offences, from harming the environment to going on investment strikes, expatriating profits, and dodging taxation.

It is a strange world when those who work so hard to build the economy and create opportunities for the poor and the unemployed are held up as villains while the politicians and activists, who get in the way and make it so difficult to succeed and invest, are held up as righteous.

But this will remain the case and you will continue to be harangued and abused – the more so the harder you work.

Threat 5: The government

Lastly we get to the government itself. Far from creating an enabling environment for investment, many policies of the government have the opposite effect. I would advise you to expect that in the immediate period ahead the government will:

§  Seek to ramp-up its racial engineering policies and place ever more onerous racial obligations on your business and those you do business with;

§  Accelerate its efforts at wealth extraction through regulation – to regulate you and your industry in such a manner that you are forced to cede more ownership and control of your firm;      

§  Further erode property rights protections, not just in the arena of land but in areas that range as far as intellectual property rights and patent protections (land is simply the thin edge of the wedge that, because of its historical connotations, is being used to bulldoze property rights protections more broadly);

§  Introduce more onerous labour regulations and increase the cost of hiring and the creation of opportunities for inexperienced and badly educated people; and

§  Raise tax rates mainly through indirect and backdoor taxation in the form of various levies and related taxes such as those on fuel, carbon, and sugar – government expenditure as a share of GDP is expected to maintain record highs and the government’s growth targets are unlikely to be realised, meaning that policy makers will ever more look to you to finance the budget deficit – and to your customers and consumers

South Africa’s economy is this year expected to grow at a third of the average rate for emerging markets and demonstrates an official unemployment rate of over 25%, while emerging markets tend to reflect rates well below 10%. The reason in the main is not corruption or state capture but that the domestic investment environment is not competitive and it will not become competitive as long as the dogma of NDR thinking for the ANC or white privilege thinking in the media and political opposition continue to inform the content of government policy.

What to do

It’s a pretty daunting list of obstacles you confront. But that you are here at all suggests that you are up for a challenge. There are many analysts who will tell you that things will now get better and indeed they could if the government could be weaned off its crippling ideology – the potential is extraordinary if that were to happen and we could so easily become a prosperous and middle income economy.

But I have seen enough since December to say that I don’t believe that is going to happen in the immediate period ahead and I would advise you, if you are committed to South Africa, and want to help to make it a success, to consider the following strategic options.

The first is to be wary of doing business with the government. It may be lucrative for a time but when the tide turns on you – you could be completely wiped out and I, in any event, expect the government to act with growing malice towards you.

The second is to be wary of large firms. Under political pressure they will also turn on you and act with increasing malice especially with regard to pressuring you into falling in line with the racial dogma of the state.

The third is to be wary of your exposure to fixed assets and investment in South Africa. Such assets are particularly vulnerable to regulatory or other takings by the state. Each business is of course unique and there is without doubt a place for fixed investments – I would just be wary if my whole business was completely dependent on, and exposed to, such investment.

The fourth and related point is to be wary of being a South African business alone. Look to diversify your client base across the region and the world to limit your risk should the business environment turn sharply negative in the period ahead of us.

The ideal position to be in, then, would probably be that of a small- to mid-size firm, with limited dealings with the state or organised business that was more dependent on intellectual than fixed capital and was providing services to a client base in as well as outside of South Africa.

If that describes you today then, structurally, I think you are quite robustly positioned. If you tick none of these boxes then I would think carefully about whether you are not exposed to an inordinate amount of risk.

Once you are properly structurally positioned there are some other things that I think you should consider to make your business even more robust.

The first of these is not to become part of the problem. If you do not want to fall victim to the racial engineering edicts of the state then as far as possible try not to comply with them or to force your suppliers and partners to. The brilliance again of NDR-type policy is that the victim comes to apply the policy to himself. I know there are legal and regulatory hurdles here and I am sympathetic to them. But there is a point when you must take a stand on principle. Last year a bank threatened to withhold a significant amount of financing from our think-tank if we did not commit to the racial agenda of the state. We explained that we could not do that as it would be to betray our founding principles – principles that had withstood far greater pressures and more serious threats, and we forewent their money accepting in its stead the financial setback that followed. But we had made a stand in favour of what we believed was the right thing to do.  

The second is to fight. Don’t put up with abuse. You are working so hard to build a better South Africa and must be proud of that. Be actively involved in the policy and media environment. Join those organisations that fight for the right things. Join them all. Your investment in groups like Afrisake and the IRR are a critical part of your having a future here. Piet and I and my colleagues care what happens to you and fight very hard for you. Your debit orders make that possible. If you don’t do that there is no-one else who will stand up for you – you will be alone and isolated and in time you will be ground down and wiped out. But if we can unite by force of numbers the great majority of hard working, God fearing, law and order South Africans –black and white - then we can stick it to the politicians and turn the country.

Lastly and little bit beyond your business, perhaps – put yourself in a position where your whole life is state-proof. If you have some wealth, talk to your financial advisor on diversification overseas. Make sure your children get the best possible education, as that is the one thing the state cannot take away. Look to live in a community that has access to high-quality non-state security, healthcare, education and services. If you or your children have the opportunity to gain some international experience or work outside of the family business, encourage them to do that before they join you.

Success in volatile emerging markets depends on firstly understanding the formative ideology of the government and then being realistic about the policies that flow from it. Thereafter, you must take strategic decisions to mitigate risk and give yourself as broad a diversification a possible. The key is to create choices. The more of those you create, the more robust you will become.          

If you agree with what you have read then join us or SMS your name to 32823. There are millions of people just like you who are sick and tired of political correctness, constant vilification, populist racial incitement and government hostility. Join them by joining us and together we can turn our country around.