When public and private resources are mobilised, they must be directed to projects that result in sustainable change, says Business Leadership South Africa (BLSA) CEO Busisiwe Mavuso.

In her latest weekly newsletter, she argues that both the effort to rescue ArcelorMittal South Africa (AMSA), using Temporary Employer/Employee Relief Scheme (TERS), and the proposed Transformation Fund, must demonstrate that they will actually solve the problems they intend to.

She notes that the Department of Trade, Industry and Competition (dtic) has positioned the Transformation Fund concept paper as a joint business and public-sector initiative, open to business feedback, adding that BLSA will “be glad” to provide formal input in due course.

Mavuso notes that higher economic growth can help address the unemployment crisis, noting that structural reforms increase economic capacity, reduce the cost of doing business and enable companies to invest in expansion.

“When companies invest to expand, they hire people. That is sustainable job creation because those employees are adding to economic output, enabling companies to generate profits which drives further investment and further growth. 

“It is tempting to use the scarce resources of the State to keep people in work. Sometimes that is justified when there is a brief and finite economic shock that undermines a firm’s capacity to maintain their workforces.

“Covid was an obvious example when lockdowns forced companies to close their doors making many workers redundant, but when lockdowns were over, those jobs were again sustainable,” she says, arguing for avoiding the use of public money for jobs that are not sustainable, because they fundamentally are not adding value.

Mavuso expresses that a company is not sustainable if it cannot generate a profit.

“If the State steps in to subsidise that business, it must be with a very clear exit plan.”

She explains that such subsidies can take many forms, including direct investments into the companies, tax breaks or tariff protections, adding that it might be in the public interest to take these steps, provided the public is net better off on exit of those investments.

“But if there isn’t, we are throwing good money after bad. And that damages economic growth and undermines the sustainable job creation we should be striving for.”

Mavuso highlights the series of government-led efforts to fund AMSA and the proposal to set up the mooted R100-billion Transformation Fund. 

In the case of AMSA, the latest rescue plan proposes using the TERS, a scheme created to support workers through the Covid-19 lockdowns.

Mavuso explains that TERS will fund 2 982 employees for the next 12 months at a cost of R417-million.

“This would be fine if there was a clear and sustainable end point, but there doesn’t appear to be one,” she expresses.

Mavuso notes that AMSA has taken the decision to close its longs steel business amid extensive financial losses.

She adds that the company has already received various facilities from the Industrial Development Corporation to support working capital. The TERS facility is on condition that the company participates in a turnaround and recovery programme. 

However, as of last week, Mavuso points out, the company was continuing with plans to wind down its longs operations.

The relevant AMSA plants produce long steel used in rail, mining, agriculture and other industries. If the structural reforms needed to drive growth came through, AMSA would likely see considerable demand for its output, she argues.

A restructured logistics system, for example, would trigger major investment in rail infrastructure through public-private partnerships.

“Firms are failing every day while they wait for the structural reforms needed to drive the economy. AMSA is a highly visible example but there are countless others. If we are to deploy public resources, let's make it count toward structural reform that drives sustainable economic activity.”

In this vein, the dtic published a concept paper last week regarding its R100-billion Transformation Fund.

“Again, when money is being directed toward solving a problem, we need to make sure that it will result in a sustainable solution. The challenge for the fund concept is to demonstrate that it will meet this bar  – sustainably solve a problem in a cost-effective way,” says Mavuso.

She expresses, however, that the concept paper contains little analysis of what exactly the problem is that the new fund will solve.

Hence, she posits that, while transformation should happen faster, particularly enterprise development, the obstacles that need to be managed are complex.

Mavuso notes that an estimated 70% of all new businesses fail in South Africa, for many reasons, including a lack of skills, access to markets and access to funds, adding that the various initiatives that have attempted to solve this problem, including the supplier and enterprise development component of broad-based black economic empowerment, have had mixed success. 

There are some good examples where companies have fostered successful black-owned businesses and integrated them into their supply chains, ensuring their long-term sustainability, says Mavuso, highlighting, however, that there are many other companies that have failed to get traction despite significant funding. 

She argues that it would be “much easier” to see the logic of the fund if the concept paper carefully diagnosed the problems and presented a clear institutional solution.

“We know from institutions that are currently involved in enterprise development that it takes armies of mentors and vast resources to support businesses, and they operate on a tiny scale compared with the R100-billion fund target.

“The paper says almost nothing about the institutional design that would be required to achieve its aims or how it will resource it and ensure it is successful.

“Positively, the dtic has positioned the paper as a joint business and public sector initiative and is open to business feedback to help develop it. BLSA will be glad to support that ambition and provide formal input in due course,” she says.