New FirstRand chair on land reform, income inequality and ‘broken’ SOEs

New FirstRand chair Roger Jardine says “there is tremendous upside potential should property rights evolve to be more inclusive of South Africa’s real economy” – but makes the counterpoint that “if land reform is done in a way that prejudices property rights, the downside risk potential is equally significant.”

Writing in the annual report of the country’s largest banking group by market cap, Jardine says that “so far, the Presidency is navigating this issue well. The process is transparent and designed to be inclusive of all views, but, the assertion that mortgaged private property assets can be expropriated without compensation (and the banks will just have to absorb the loss) is a ludicrous and dangerous fallacy.

“The Banking Association of South Africa estimates that the current total exposure that banks have to property assets is approximately R1.6 trillion. Most importantly, these loans are funded by depositors’ money – that’s yours and mine.”

The reason that there is so much upside potential is, Jardine says, because of the simple fact that “best estimates suggest that more than half of South Africans occupy land without their property rights being recorded in the deeds registry, leaving them outside of the formal economy and unable to put these assets to productive work within it.”

FirstRand has a proud history of its non-executive chairs using the Chairman’s Report to take strong positions on matters. Last year, then chair Laurie Dippenaar mounted strong arguments against two myths about banks in an effort to debunk them – one, that the banks are ‘too big’ and anti-competitive, and two, that they ‘refuse’ to transform. (Read: FirstRand’s Dippenaar on size of SA’s big four and state capture)

Jardine has been an independent non-executive director of the banking group since July 2010. He was appointed chairman with effect from April 2018.

In his letter to shareholders, he points to the fact that while Brazil’s Gini coefficient was similar to South Africa’s in 1994, “inequality in Brazil has fallen on the back of strong economic growth and, in addition, the country has experienced a significant rise in secondary school enrolments and graduations.” Over the same period, we experienced “low economic growth, a moderate reduction in poverty levels, but a sharp rise in income inequality.” Today, South Africa is one of the most unequal societies in the world.

“The obvious question is why does South Africa remain such an unequal country 24 years after democracy? Why did Brazil do better?”

While there are many reasons – including that “ours is an economy that is both skills-intensive and capital-intensive and does not generate a sufficient number of blue collar jobs, which is critical to reducing unemployment and inequality” – Jardine highlights the fact that the “World Bank and other institutions have also identified that the skewed distribution of land and productive assets is a key constraint to South Africa’s economic growth potential.”

He is blunt in his assessment of the election of Cyril Ramaphosa as president of South Africa earlier this year: This “marked a significant shift away from nearly a decade of a very poor local and international narrative about the country characterised by state capture, looting and a general breakdown in public sector governance and trust.

“We have seen some early signs of positive change. Certainly, the new boards at the large state-owned enterprises (SOEs) are welcomed and have been well received by investors and rating agencies. The importance of these changes should not be underestimated, as some of the larger entities continue to place risk on the country’s balance sheet.”

But he argues that “whilst the tackling of broken balance sheets and business models at the systemic SOEs does seem to be top of mind for government, we must shape a view on the less systemic enterprises.

“For instance, we need to ask ourselves if South Africa really requires a national carrier that costs the country billions of rand a year when the vast majority of our citizens do not use its services. How can it make sense, in a country with thousands of chronically underfunded state schools and hospitals, that tax monies continue to flow to SAA and SA Express, particularly as both businesses are incurring material operational losses?

“The banks can step in with short-term liquidity, but this is just ‘kicking the can down the road’ and it is not sustainable. If there are strong business cases in support of tourism and business revenues, then perhaps government needs to make a shareholder decision to accelerate the process of finding strategic equity partners for these assets.”

Jardine is downright scathing: “Fiscal resources of the magnitude required to keep these SOEs going can be used elsewhere for the benefit of a much larger proportion of our population. Questions of ideology around the ownership of ‘state assets’ cannot and should not prevail when children are drowning in pit toilets.”

He says that many of these risks facing South Africa – chiefly policy uncertainty – will be around for “quite some time, and it is easy to be pessimistic about the future. We should, however, not forget how despondent we were this time last year.”

He says we should celebrate the progress that has been made since Ramaphosa’s appointment.

The success of Ramaphosa’s stimulus plan will, like many of the grandiose plans announced by the government, depend on its implementation. Jardine makes it clear that “offers from the private sector to get involved in the management and implementation of some aspects of the government’s reform initiatives” exist and that he hopes the government will make use of them. Public-private partnerships (PPPs) “will be key to unlocking the potential of this country and the country’s renewables strategy is an excellent example of what success in this space looks like.”

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