Rejuvenating South Africa's economy - A retail sector perspective




Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or its Board or Council members. All records and findings included in this report, originated from a panel discussion on developing a new economic blueprint for South Africa, which took place November 2021. Author: Olivia Main Editor: Daryl Swanepoel


Content

Introduction


Key growth constraints

  • Government-business roles and relationships

  • Floundering service delivery

  • Rampant corruption

  • The tax burden

  • Red tape and legislation

  • Biased competition

  • Environmental unsustainability

  • Skyrocketing insurance

  • Slow vaccination slows economy

Towards a new growth path

Conclusion References Cover page image: www.lsretail.com


Introduction


The recent riots and looting in KwaZulu-Natal and Gauteng have starkly illuminated both the strengths and vulnerabilities in the retail sector, and that South Africans, by and large, depend on the smooth running of these supply chains for not only putting bread on the table but also for the survival of the economy.


Over 40 000 formal and 50 000 informal businesses were affected by the catastrophe, many of which have not survived, putting a massive number of jobs at risk and hurting consumer and business confidence. The predicted impact of the unrest on the economy is estimated at R50 billion, not to mention the likely greater long-term damage. According to the National Treasury, this devastating event will result in almost 1% being shaved off South Africa’s GDP in 2021 (BizNews, 2021).


Statistics South Africa (Stats SA) revealed that retail trade sales shrank 0.8% year-on-year in July – a steep decline compared to the 3.3% growth forecast by a Bloomberg poll of economists, and down from June's revised 10.5% expansion (Business Day, 2021b). In the biggest month-on-month drop since April 2020, July retail sales plunged 11.2% when the sector collapsed under the weight of a hard lockdown (Daily Maverick, 2021a).


This comes at a crucial time in the retail sector’s – and the economy’s – attempted recovery from the ravages of the Covid-19 pandemic and the continuing bottlenecks created by electricity outages, service delivery failures, legislative roadblocks, rampant corruption, and insufficient insurance pay-outs. Now compounded by the threat of a fourth wave on the doorstep, the future looks, frankly, frightening.


With a sense of urgency to address this bleak outlook, the Inclusive Society Institute has committed to an intensive three-phase research project, culminating in a blueprint for rescuing and reigniting South Africa’s flailing economy. This map will, ultimately, be shared with government representatives in the presidency and other important policy institutions and public bodies, such as Parliament, early in 2022.


The research is being guided by three individuals: Theo Vorster, an economist, Professor Tania Ajam, an economics lecturer at the University of Stellenbosch and member of the president’s Economic Advisory Council, and Vusi Khanyile, Chairperson of the institute and a member of the president’s State-Owned Enterprises Council.


A webinar discussion in November this year, hosted by the institute, brought together a few big players in the retail sector and the Consumer Goods Council of South Africa (CGCSA), among other representatives – as part of the second phase, to interrogate what in terms of the generally accepted economic architecture of the world South Africa is doing wrong. And to explore fresh out-of-the-box ideas that could grow the economy beyond the expected 2-3% to the 4-5% trajectory that is needed to really start chipping away at unemployment and backlogs (National Treasury, 2021).


Key growth constraints


Government-business roles and relationships


There is a growing lack of trust in government to deliver on their commitments and to implement the policies they have agreed upon. The view of the participants in the webinar was that it is not necessarily unwillingness of government to engage that is the problem, but rather that business is confronted with career civil servants who do not necessarily understand how business operates and what the specific challenges are because they have zero experience in running a business themselves. As a result, they do not fully appreciate their role in addressing these challenges to create an enabling environment.


The State, too, is uncoordinated, lacks capacity, and rather paradoxically, while their personnel bill is quite huge, it coexists with too little skills, and often vacancies in critical positions. These issues slow down processes substantially, often making it near impossible to operate efficiently as a business.


A participant in the discussion representing one of the larger-sized retail organisations also suggested that business needs to consider the situation in South Africa from a high-level perspective. Business needs to step back from politics and engage more on policy, especially since government operates in silos that puts sectoral interests above the big picture national interests.


There are too many cases of vested interests being put on the table, and people not being prepared to move on them because it is not within their narrow sectarian interests to do so, where it could be in the long-term interests of the economy.


President Ramaphosa himself acknowledged this one-dimensional approach after the ANC won the 2019 elections when he said, “We have slid into a pattern of operating in silos. This has led to lack of coherence in planning and implementation and has made monitoring and oversight of government’s programme difficult. It has become a significant deterrent to investment.” His promise to set up a reformed policy unit within his office as the central control room of coordination between government and business has yet to materialise (Business Day, 2021a).


Floundering service delivery


Municipal service delivery in South Africa is a blight on business productivity and a deterrent to investors. The incapacity of municipalities, particularly in small towns, to deliver, runs the gamut of services: from water, electricity, sanitation and refuse removal to fire brigade services. As a consequence, small businesses, and even a few big corporates, are having to close their doors.



A discomforting anecdote shared by one of the business owners during the discussion, occurring a few months ago, involved a fire in one of their stores in a town in the Eastern Cape. The local fire brigade was on strike and when the brigade from the next town 40km away eventually arrived and plugged in their hosepipes, there was no water. The store was burnt to the ground.


There have been many cases in point recently where high-profile businesses have been backed into a corner by unreliable local services, with the only escape being to close or move operations – Dairy company Clover was forced to shut down South Africa’s biggest cheese factory in Lichtenburg due to massive losses from water and electricity supply problems. Chicken producer Astral is in a legal battle with the Lekwa Municipality for services not being rendered at its Standerton plant in Mpumalanga (Moneyweb, 2021).


These are often the only employers in the more rural areas, meaning the locals bear the brunt of the weak infrastructure and delivery, and the municipality is stuck in a vicious circle of dwindling resources and capacity.


Moreover, businesses are burdened by extra costs related to substituting for municipal service failures, for example, installing generators and water filtration and storage systems. Often, they also bypass the municipality and roll up their own sleeves to provide services to the communities in which they operate, fixing water plants and potholes. All of which amounts to a costly exercise which few businesses can sustain, and a right hook to the jaw of the economy.


The auditor-general’s 2019/20 annual report on the financial state of municipalities makes for depressing reading. Not even a quarter of municipalities produced performance reports by the audit deadline, 22 councils had disclaimed audit outcomes – the worst kind – with almost R5.5 billion in unexplainable expenditure, and 27% indicated that they may not be able to continue. A mere 27 of the 257 municipalities in South Africa were given a clean bill of financial health. Then Finance Minister Tito Mboweni said in his Budget Vote debate in May this year that 163 municipalities were in financial distress and 40 in financial and service delivery crises – and 102 municipalities adopted budgets they could not fund (Daily Maverick, 2021b).


In the majority of cases, the problem comes down to poor political leadership and skills deficits rather than vacancies in the finance department. In all cases, it is inexcusable and a total failure in government policy. The bottom line: if South Africa does not resolve particularly its power issues, the country will not resolve its economic issues.


Rampant corruption


Corruption continues to be a knife in the back of the South African economy, bleeding it dry. The news is filled with new cases every day, implicating high-profile officials and management personnel at every level within government and state-owned entities (SOEs), and with the lack of punishment in the majority of these instances.


Aside from the obvious examples of state capture weakening SOEs, Covid-19 rules fuelling illicit trade, and the misappropriation of Covid-19 funds, let us look at a recent newsworthy example. Members of Parliament found that the sale of South Africa’s crude oil reserves by the Strategic Fuel Fund valued at about R6 billion had been illegal and would cost the fund billions. To date, the fund has withheld the information required to hold the guilty parties accountable and the person who ultimately signed the deal is the chairperson of the Portfolio Committee on Police (Eyewitness News, 2021). This begs the question so frequently asked in connection with other probes: Is it any wonder that nobody has been arrested yet?


But as a participant in the webinar dialogue pointed out, corruption is a two-way street; there needs to be supply and demand for it to exist. It is not just the government who is culpable, businesses also play their part by accepting the bribes and dirty deals.


The truth is, corruption in South Africa is actually deeply rooted in the past, created over centuries. The widespread belief that it is both new and easy to fix is a fallacy. The blurring of the public and private sectors is a feature of the last years of apartheid which has continued into the new regime in many ways: the illicit networks between business and government, businesses offering “help” to officials with political affiliations in the way of cars and homes, shares and seats on boards (Friedman, 2020).


Corruption today is also a symptom of another way in which the past was carried over into what was meant to be a new society. The groups which control the state use their power to ensure that they control the economy too, which makes it extremely difficult for new entrants to penetrate. This may explain why the corrupt networks are so entrenched, particularly at the local and provincial level.


Reducing corruption in South Africa is not impossible, but to be successful it is going to take more than some high-profile convictions and continuous public railing; it will need thorough solutions that strike at the root causes. And plenty of time.


The tax burden


One of the consequences of allowing corruption and bribery to continue unchecked is continuously rising taxation and uncertainty with regards to what the efficiency and impact of this spending is. In a brief analysis done by a high-level executive in the discussion, it was estimated that currently approximately 17% of all income the average person in South Africa earns is paid in tax – in terms of duties, VAT, fuel taxes, road taxes, rates, etc. The most recent being sugar taxes, under the guise of health, and, of course, a massive increase in fuel levies.


Although then Finance Minister Tito Mboweni’s Budget Speech in February was more optimistic than expected, citizens still suffered an above-inflation increase of 5% in the personal income tax brackets, which was expected to provide relief of R2.2-billion (Allan Gray, 2021). Current Finance Minister Enoch Godongwana expressed his views at a recent ANC policy meeting, saying that South Africa cannot tax its way out of an economic crisis and pointed out that the recent tax increases did not yield substantial additional revenue (BusinessTech, 2021b).


However, suspicions of skulduggery around tax funds were still a grave concern raised by several of the participants – gleaned from personal experience, in some cases. For one participant, an agreement with government to support reducing plastic bag use by charging customers for bags, with the objective of handing over the funds to government for use in environmental projects, has soured. There is no evidence that this promise is being carried out by government or of where the funds are going. And the same can be said of the sugar tax that is supposed to be a fund for health issues.


Another widely reported concern is the accelerated exodus of so-called high net worth individuals out of South Africa of late, with one of the reasons being South Africa’s currently high tax rates for individuals and a threat of future increases, without the trend abating.


Red tape and legislation


South Africa was once an easy country with which to do business. But those days are over. For now, there is so much red tape that it is verging on impossible to start or run a business, let alone a successful one. The Department of Trade, Industry and Competition and SARS are constantly putting up new barriers that are prohibitive, especially for small businesses.


A number of cogent examples were highlighted during the discussion. One being that SARS requires certain start-ups to show R1 million in sales before qualifying for a VAT number (SARS, 2021). A business’ vendor registration can be put on hold for years due to the struggle to get a VAT number. Yet, their buyers need them to be VAT registered. Small enterprises simply do not have the capital to wait this out. In many instances, bigger organisations are having to step in to facilitate operations with small businesses or risk a faltering or stagnant supply chain. Evidenced recently during the unrest, where big business played a crucial role in food security and worked with law enforcement agencies to deploy more police to the area, keeping the supply chain moving and stilling the violence somewhat.


This type of approach leaves enterprises between a rock and a hard place, with only two feasible choices: stick to the legal route and wait it out, risking liquidation in the process, or continue illegally – without certification or by greasing palms – until the resources are available.


Other examples of red tape blocking the way include legislation around health levies, the recent Companies Amendment Bill, Agricultural Product Standards, SMME and labour legislation. There are horror stories of small businesses being taken to the CCMA by vindictive employees and then when the accusation is found to be false, the small business owner still incurs considerable costs, while the employee walks free without being sanctioned. The CCMA might be appropriate for larger corporates, but it is definitely not an appropriate forum for smaller businesses (Bendeman, 2006).


Immigration is another stultifying issue. South Africa’s borders are quite porous, which allows unskilled labour to enter, and yet Home Affairs places visa restrictions on skilled immigration. For businesses to bring skills into the country, which benefits the economy in the long term, it can take months, if not years, to get visas and permission to enter.


Biased competition


South Africa’s competitions policy has gone totally haywire. It has moved away from issues of competition towards issues of interest, where the realm of the legal is being replaced with the realm of politics. This is a dangerous trend.


The same can be said of BEE, which has become a big sacred cow. BEE is vital to our economy but blocking the way with middlemen raking off commissions without adding any value will only suffocate it. BEE should be about providing value and delivery, about being incentivised for production to increase employment, not just about race.


Another sentiment which came through strongly during the discussions was that government needs to do proper rational assessments before they get involved in policy, as there are too many unintended consequences to very clever pieces of legislation that are put in place.


For example, there are two issues in the Consumer Protection Act (CPA) which are negatively impacting the economy in South Africa. The first one involves small business. The legislation says that every single item that is sold in any store is effectively the personal responsibility of the store owner. The consequence is that every supplier and vendor is forced to provide a contract assuming the liability. Further to this, every food item has to go through a highly rigorous food safety audit process, which could cost a small business up to R30-40 000 per year. Most cannot afford it, which excludes their involvement in the big business environment (President of the Republic of South Africa, 2009).


A further consequence of this is that there is a serious problem with food waste in South Africa. In fact, food waste is a global problem – the World Wide Fund for Nature South Africa found that 10 million tons of food gets thrown away annually. Retailers and restaurants and food producers are throwing away a huge amount of food every day that could be feeding starving people. But under the CPA legislation, the personal risk and liability involved in giving away food is prohibitive (IOL, 2021).


Environmental unsustainability


Environmental issues are becoming increasingly critical in South Africa, given the country’s huge carbon footprint. In fact, it is touted as being one of the biggest polluters in the world, with Eskom being the main culprit – a scandal which is hurting the economy.


New research from the Centre for Research on Energy and Clean Air (CREA) revealed that Eskom is now the number one emitter of potentially deadly sulphur dioxide (SO2) in the world. Eskom’s 15 coal power plants (44 GW) emitted 2100 thousand tonnes (kt) of SO2 – more than the entire power sector of the European Union (EU) and United States (US), or the US and China, combined. The expert analysis concludes that only India’s entire power sector accounts for more SO2 emissions than Eskom (CER, 2021).


When compared with the World Health Organisation’s recently updated guidelines on ambient air quality, it is clear that unless Eskom complies with domestic air pollution laws or decommissions its older plants, South Africa will be hard pressed to keep the country’s air quality safe.


With an upcoming R131 billion injection into the country from the US, UK, France, Germany and the EU on the horizon – funds for transitioning to a low carbon economy by investing in renewable energy, green hydrogen and electric vehicles – there are no celebrations afoot just yet, not with the concern around holes in the government purse strings, causing apprehension about where the investment will land up in reality (BusinessTech, 2021a).


Skyrocketing insurance


The impact of the insurance industry’s increased costs due to the rioting in July has meant spiralling premiums for businesses, with some now not being able to access insurance at all. In July, the South African Special Risk Insurance Association (Sasria) – the state-owned civil commotion insurer, covering businesses and citizens against losses from rioting, strike action and public disorder – expected the damage would be in the region of R5 billion, but that figure ballooned to R32 billion. They are now considered the most expensive riots in the world (TimesLive, 2021).


This has accrued considerable costs for businesses, even without the traditional rates increase of February 2022 just around the corner. According to a senior level participant in the forum, Sasria is talking about a 16-17% increase in its rates and cannot guarantee that it will be in the position to pay out all the claims from the recent unrest.


Considering that businesses are already struggling to get their claims paid out timeously and straining against too high insurance rates, there is a real concern about surviving through another riot.


Slow vaccination slows economy


Covid-19 has put down roots, which means we need to rapidly speed up the pace of vaccination in South Africa, otherwise economic recovery will remain a distant target. In President Cyril Ramaphosa’s latest address on South Africa's response to the coronavirus pandemic, in November, he stated that only 35.6% of adult South Africans are fully vaccinated against Covid-19. He also said that while this is welcome progress, it is not enough to enable us to reduce infections, prevent illness and death and restore our economy (Ramaphosa, 2021).


With the dreaded fourth wave on its way, business owners raised concerns apropos the potential for tighter restrictions being reintroduced. Under these circumstances, from both a local and international perspective, businesses will once again be unable to trade effectively and efficiently. And many will not survive.


Towards a new growth path


Suggestions for addressing growth constraints


Bold leadership


South Africa needs level-headed and bold leadership that will take a principled stand and act, rather than just spout policy rhetoric. There is also the need for visible accountability and consequences for malfeasance or neglect of duties.

Political parties need to ensure that they build capacity in local government, appointing people on merit, irrespective of their political stripes, who can ensure real delivery.

It would also be prudent to take the bold step to restore confidence and free up the economy to stimulate growth by reducing taxes and offering incentives to businesses to reinvest.


Combat corruption and crime


Corruption being a two-way street means the private sector also needs to stand up and be held accountable. Businesses need to walk away from dodgy deals and bribery. Government and business need to find a way to plug those holes where corruption is slipping through into the system.

The Crime Risk Initiative of the Consumer Goods Council is identifying different police stations as centres that can be responsible for policing specific types of crimes, for example, a station which focuses on gender-based violence. This has the potential to increase State capacity to combat crime.


Ease policy and regulations


New policies and legislation need to go through rigorous rational assessments before being implemented, looking at the implications across the value chain, to avoid unintended consequences. Legislation needs to be streamlined in order to speed up business – by removing unnecessary red tape, freeing up small business, freeing up labour legislation.

There are a number of regulations that could be nuanced to allow for existing mechanisms to be more effective, and to empower small businesses rather than to act as a one-size-fits-all, such as targeted exemptions for issues like food waste.

The Department of Small Business needs to become more involved in advocating for the simplification of legislation, processes and taxes.


Larger corporations should look at how they can improve their internal processes to make it easier for small businesses to be productive suppliers by, for example, having only one point of contact and one database to navigate.

With an incoming fourth wave of Covid-19, it would be well advised to put regulations in place which allow for mandatory vaccination requirements within businesses, to speed up economic recovery from the pandemic.


Incentivising localisation


Localisation is not only about encouraging businesses to buy local, but also about incentivising people to become productive within their communities. Instead of just handing out social grants – one of the most constructive pieces of government legislation and still a vital resource – make it an incentive to get people productive, picking up litter, fixing potholes, completing useful tasks to earn their stipends. It would have a huge impact on their self-worth and skills development and on the economy.

Government needs to encourage its partners, particularly in the unions, to look at piece-rate incentivisation. Which does not mean moving away from basic wages, but rather incentivising performance in a way that creates a basic wage that is not exploitative; there is a constructive way to reward good performance and sanction non-performance.


Bolster partnerships with government


There are huge benefits to creating a sustainable mutually beneficial relationship with government, for both business and the economy. Business needs to start working with government on projects such as the Extended Public Works Programme to figure out the best way to fix local authorities.

One way would be to partner with government and with municipalities to fix infrastructure through an agreement where business takes on the responsibility and cost and then claims back from rates or other forms of municipal income streams. Also, partnering with government to create public works programmes that incentivise unemployed and unskilled people within their own communities to fix potholes, maintain schools, etc. In other words, workfare rather than welfare grants, with the intended outcome of increasing experience, skills transfer and economic access.


Constructive skills transfer


South Africa needs to get its teacher, nursing and artisan training colleges back up and running, and reintroduce internships to focus on skilling people to do the work, rather than just to get the qualifications. These are key skills that are in short supply and without people to do these jobs in the future, the economy will come unstuck.

Big businesses should look at getting involved with programmes such as the Youth Employment Service (YES) programme, a joint initiative by the private sector and government with the aim of assisting South Africa's youth to gain work experience through employment placement. By offering internships to youths, they will be trained and developed, and their skills can then be utilised elsewhere within the economy.


Backing small business


Involving small business, the people on the ground, in government decision-making before these decisions become laws will go a long way to saving the time and money that gets waisted when these plans do not work in practice and need to be amended. Small business has valuable insight and input that could help to shortcut long, drawn out government policy processes.

Another way to assist small business, and the economy, is to appoint government officials that have some understanding of or experience in the business world.

Treasury needs to try to streamline taxation by putting in place a system used in the past that required a business to have a spending plan and a delivery plan in order to receive funds. This way, they all get the budget, but they do not get the money unless they can show how it will be spent. Reverting to these policies as a government could yield rapid results for the South African economy.

Treasury could also look at tax incentives for businesses involved in environmental, social and corporate governance (ESG) projects. This would be supportive of both small business budgets and a sustainable environment, which has become a critical aspect for the global economy.


Independent service delivery


Government needs to acknowledge that, in the medium term, it does not have the capacity to address the energy crisis in South Africa. It needs to move away from a monopoly energy/electricity provider and to embrace new technologies and independent electricity provision.


Conclusion


One can understand the frustration clouding the dialogue on what is to be done to revive South Africa’s ailing economy. ‘Why are we still throwing money at this question, given the vast expanse of research already done?’ and ‘The answers are already out there!’, are on the lips of many in the business space. Despite the appreciation that there is always an opportunity to engage and get more information, it is widely agreed that what needs to happen is clear. But this assumes that the politicians have read the research, and that is not necessarily the case.


The Inclusive Society Institute is in agreement – it is time to wrap up the rhetoric and focus on the actions. Presenting an academic document would simply be flogging a dead horse. Instead, the institute will present a targeted ten-point plan to be implemented. The research will be available to read, but the ten-point plan will be the main focus. And it will be put into the right hands.


The retail sector plays an important role in this plan, as it does in the greater South African economy. Retail trade accounts for a big slice of South Africa’s gross domestic product, at 15% of GDP, and employs 20% of the workforce. It has been targeted by the government as a pivotal component in the economy’s recovery (Daily Maverick, 2021c).


With the Covid-19 fourth wave looming large as the busiest season of the year for the retail industry is about to kick off, there is no silver bullet to ensure businesses, or the economy, will not be affected. Retailers can take heart though that the supply chain and stock level challenges from last year will be less harrowing this time around.


According to Stats SA, the change in retailers’ inventory levels for mid-2020 (from 2020Q2 to 2020Q3) showed a more than R200-billion drop in inventory levels as retailers let stocks run down because of uncertain expected demand and lockdown measures, resulting in suppliers not being able to secure sufficient stock. But the data for 2021 Q1 and Q2 shows far less volatility: June 2021 (2021Q2) data only shows a drop of R21.7-billion suggesting a significant recovery in the stability of inventory levels (FNB, 2021).


Although there is an indication that customer spending will not be what it was prior to Covid-19, there is still hope within the retail industry that this season will see a more free-handed customer base than the last and a real uptick in its contribution to the economy.


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This report has been published by the Inclusive Society Institute

The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.


Email: info@inclusivesociety.org.za

Phone: +27 (0) 21 201 1589

Web: www.inclusivesociety.org.za