Posted on May 23, 2023

Business Leaders Fear That South Africa Could Become a Failed State

The Economist, May 22, 2023

Business leaders were ecstatic when Cyril Ramaphosa became South Africa’s president in 2018. Here was one of their own: a pragmatic tycoon to fix the incompetent kleptocracy of Jacob Zuma. Yet five years on, those running large businesses are exasperated. Bosses from several different industries—such as Neal Froneman of Sibanye-Stillwater, a mining company; Daniel Mminele, the incoming chair of Nedbank; and Ralph Mupita, of mtn, a telecoms firm—have sounded the alarm. Could South Africa become a failed state?

Already in 2023, blackouts by Eskom, the electricity utility, have surpassed those of 2022, hitherto the worst year on record (see chart). Businesses are planning for the total collapse of the grid. “If this crisis continues, we will not be able to guarantee stable supplies of food, medicines and other essential goods,” wrote retail bosses in a letter to the president in February. Morale dipped further when the rand plummeted to a record low after America’s ambassador earlier this month accused South Africa of covertly sending arms to Russia.

CEOs have all but given up on Mr Ramaphosa fixing the problem himself. So firms are sending staff to government departments, including his office: a very South African solution. Those with means find private alternatives to a failing public sector: with health insurance, private schools and security, or solar panels on homes. It also illustrates the scale of the crisis.

Links between big business and the government began before 1994, when Nelson Mandela and his African National Congress (ANC) came to power. As international firms and capital left South Africa in the 1980s, the domestic groups that dominated South African business got bigger. By the end of the decade three conglomerates controlled companies accounting for 75% of the market value of the Johannesburg Stock Exchange (JSE). But some tycoons saw that white rule was unsustainable. So in 1985, defying the wishes of the apartheid regime, the chair of Anglo-American took a group to meet exiled leaders of the anc. One delegate, upon meeting Thabo Mbeki, joked to the future president: “Welcome to the capitalist class.”

Those talks led to an unwritten deal. The ANC would drop its pledge to nationalise big companies. Business would embrace affirmative action and enrich a black elite including, most notably, Mr Ramaphosa. In other respects the basic structure of the South African economy changed little: many of the same big firms still predominate—and feel less competitive pressure than peers in other parts of the world. According to research by the IMF, markups by publicly listed firms increased by 25% from 2000 to 2016. The average rise globally was 6%. Sustained markups, namely prices above the marginal cost of production, imply a lack of competition.

Problems have been thrashed out in private. In 2015, Mr Zuma tanked the rand by replacing a respected finance minister—who had helped block a multi-billion dollar nuclear-power deal with Russia—with an obscure MP. Captains of industry called a meeting with ANC bigwigs, including Mr Ramaphosa, who by then had amassed a fortune and returned to politics. Mr Zuma changed tack.

Yet today’s crises cannot be solved with a quiet word. Bosses typically cite three issues: power, logistics and crime. Last year power cuts may have reduced GDP by 7-8%; 2023 could be even darker. The blackouts caused South Africa to go from being the most reliable among mtn’s 19 African networks at the start of 2022 to possibly the worst a year later. The largest supermarket chain says spending on diesel for generators cut profits by 7% in 2022.

Transnet, the state-owned firm that operates freight rail has, like Eskom, been battered by allegations of corruption and mismanagement. Last year miners lost out on 300bn rand ($16bn) worth of forgone exports, roughly a third of what they managed to sell abroad, according to Jan Havenga of Stellenbosch University, because they could not get their goods out of the country. {snip}


Crime makes everything worse. In 2019 at least 183 infrastructure projects were disrupted by “construction mafia” demanding jobs and bribes. The theft of cables from Eskom, Transnet and passenger railways cost South Africa an estimated 50bn rand in 2022, roughly akin to the economic contribution of the wine industry. Andre de Ruyter, Eskom’s former head who courageously tried to root out graft, was nearly fatally poisoned in December.  {snip} Western officials worry that South Africa is becoming to money-laundering what Silicon Valley is to venture capital. In February the Financial Action Task Force, a global watchdog, put the country on its “grey list”, meaning that South Africa’s banks and authorities will come under greater scrutiny.


Mr de Ruyter puts it more starkly. Over unpoisoned coffee, he worries about what will happen if the country continues on its downward trajectory. “You can put solar on your roof, live in a gated estate, have private security, own a holiday home. But if 90% of the population are suffering, how is that sustainable?”