Adcorp’s employment index has reached the office of the Presidency. Speaking at the Wits Business School, Deputy President Kgalema Motlanthe reportedly claimed that labour productivity in South Africa had “declined by 41.2 percent since 1993” (polity.org.za, May 14).

Adcorp’s employment index has reached the office of the Presidency. Speaking at the Wits Business School, Deputy President Kgalema Motlanthe reportedly claimed that labour productivity in South Africa had “declined by 41.2 percent since 1993” (polity.org.za, May 14). What a coup for the merchants of such nonsense. Take a bow, Adcorp.

Leading experts in econometrics and statistics, such as Andrew Kerr and Martin Wittenberg of UCT and Servaas van der Berg of Stellenbosch University, have exposed Adcorp’s methods. As academics, they usually refrain from emotive language, yet Kerr and Wittenberg were so outraged that they headlined one of their articles “Science and Nonsense”.

Why is labour broker Adcorp taken seriously? Is it difficult to see that something is wrong with its figures? The latest Adcorp employment index (May 13) reports that 262 000 people are employed in mining. Statistics SA and the Department of Mineral Resources report double that number: 519 000 for December 2012.

The Adcorp employment index of October 2012 stated on page 1 that “employment in the mining sector has declined to 523 000” (obviously using Stats SA data), yet three pages later in the same press statement 291 000 are allegedly employed in the mining industry. This is 90 000 less than in the Quarterly Labour Force Survey household surveys from Stats SA, which grossly underreport mining employment because of its geographical concentration, as Stats SA has admitted.

Calculating productivity development by dividing gross domestic product (GDP) by the number of workers employed, or by the number of hours worked (L), does not suit Adcorp and its lead economist, Loane Sharp. This method, universally applied by economists, is too friendly to labour in their view. Every year output per worker increases – but might it be that workers are just using more advanced machinery when instead they should be working harder and more efficiently? Are we not cheating about our “true” labour productivity when we use tools?

Machines, equipment and infrastructure are invented, constructed, built, used, maintained and repaired by employees. There is no clear separation of “labour” from “capital” in the real world of production. Capital is dead without labour. Labour power in pure isolation has a limit. Better organisation, management and work morale certainly matter when rowing a boat, but strip the team naked, take away paddles and boat, and we are left with a crowd of exhausted swimmers. “Capital”, in its fundamental sense, is not stockpiles of money owned by a few.

Undeterred by this, Sharp believes he can torture out a confession of “labour unique productivity” from the statistics. In August 2011, he made a first effort in a booklet published by the Centre for Development and Enterprise. He divided the established productivity measure (GDP/L) by the real value of the capital stock (C) for each year, using his novelty formula (GDP/L)/C.

The result was an alarming diagram, misleadingly referenced “SARB”. Interestingly, if we switch the places of L and C in his new formula, keeping their values, we get the same numerical result and exactly the same diagram, arriving at an unintended unity of capital and labour, not their separation. Indeed, the capitalists are also cheating – by using workers to handle “their” machines. And now we have a catastrophic fall in “capital productivity” too (if using Sharp’s data, which is another story).

From November 2011, Adcorp’s alarming reports are instead based on a statistical method called “regression”. Since then, labour productivity in South Africa has turned “negative”. Basically, this would mean that more employment causes a fall in production. Tell that to the National Planning Commission.

The November 2011 employment index contained a bizarre warning that GDP was growing faster than employment (which for the rest of us means more output per worker and good news). But for the core alarm message, Adcorp had used a model of this type: GDP = aL + bC + c.

If the model was of any use, “a” would tell by what percentage GDP would change on average given a 1 percent change in the number of employees (L), assuming that the capital stock is fixed. Similarly, “b” would tell us the percentage change in GDP given a 1 percent change in the capital stock (C), given that the number of employees stays exactly the same. “c”, finally, is a term known as total factor productivity. In this formula, it is “everything” that affects GDP beside changes in the number of employees and value of the capital stock.

For the 2000s, Adcorp reported a positive value for the “b”, reported no value for “c” and a minus value for “a”: -0.08. This suggests that if 137 000 people are added to the 13.7 million employees in today’s economy it would lower total output by 0.08 percent and South Africa would be a little worse off.

To be useful, an econometric model must have a minimal resemblance to actual reality. “What is causing what” – this has to be thought through. If, for example, a historical drop in South Africa’s GDP occurs in 2008/09 because of a world crisis and 900 000 workers are rapidly retrenched, but slower than investors are halting investments, this doesn’t mean that South African workers are becoming less productive.

Secondly, to get accurate predictions the variables in this type of model must change as independently as possible from each other also in real life. But employment does not change independently of changes in investment! The lack of private investment is at the centre of the unemployment debate.

On the other hand, private investments can lead to retrenchments and increase unemployment (if the government or the trade unions do not intervene). The model is so riven with basic errors, these and more, that it should lead us to question its honesty. It is no surprise, therefore, that “a” was found “statistically insignificant”, something mentioned in a footnote by Adcorp. In plain language this means No Clear Result. That message alone from the computer should have stopped the report.

But these points and more are superfluous. Sharp’s model contains a fundamental conceptual error. Positive value or not, “a” shows how GDP would change if we add workers without giving them more tools. It says nothing about work efficiency and so on. If there is such a thing as “labour unique productivity”, it is a part of “c”, total factor productivity: a part of the complicated interaction between machines, technology and employees and “everything” intangible that promotes economic growth; “c” quantifies the unquantifiable.

And it is because of that difficulty, that the measure, output per worker, has gained prominence as the main productivity measure in economic policy debates; and because of employees being breadwinners: it is the growth in GDP per person in the country that is our real interest.

Increases in output per worker makes us all better off, if the increased production per worker and per person in the economy is the least equally distributed.

A fall in output per employee occurred last time during the turbulent years before 1994. Today, deputy president, output per employee is close to 70 percent higher than in 1994 (diagram). In another South Africa, this had been the basis for eradicating poverty.

The last two years, labour productivity has grown at a slower pace than before, by about 2 percent per year. This is related to the revolt on the labour market. Still, output per employee continues to grow. People always continue to invent and take on board new tools to learn and to improve the use of them. To secure that this continues to happen: pay living wages to all employees. Let the mass of workers and their families share in the ever growing new wealth per person produced in the country.

Dick Forslund is an economist and researcher at the Alternative Information Development Centre in Cape Town.

Readers will be pleased to know that it was not the ANC government, any of its ministers, any of the directors-general or anyone near the top – let alone the president – who had anything whatsoever to do with the Gupta plane landing at the Waterkloof military airbase.

Readers will be pleased to know that it was not the ANC government, any of its ministers, any of the directors-general or anyone near the top – let alone the president – who had anything whatsoever to do with the Gupta plane landing at the Waterkloof military airbase.

It was the fault of the opposition. In yesterday’s debate in terms of Rule 103: “The use of the South African Air Force Base Waterkloof by the Gupta family” in the name of DA chief whip Watty Watson, it emerged from ANC speakers that it was only one or two officials who had erred.

The opposition were simply being vindictive towards President Jacob Zuma, who was entirely innocent of anything other than being friendly to the Gupta family. His name had been “dropped” to mislead the entire military, the police, private security companies and Home Affairs.

Home Affairs Minister Naledi Pandor – who has undergone a Damascene turnaround after supporting former president Thabo Mbeki at Polokwane – did a spectacular job of improving her standing with her president. “The president has done nothing wrong!” she said defiantly. All the vindictive opposition wanted to do was “to blame President Zuma”.

“They [the opposition] don’t want the public to hear what we are saying.

“Eventually, the public will come to know who the opposition is, what they are… and what they are really not interested in… definitely not the truth.”

ANC MP Annelize van Wyk said a government report on the Gupta saga had been “rubbished by the opposition”, including MPs who continued to “collect their cheques” each month.

All one can extract from the debate is that Parliament is filled with a lot of “honourable” men and women. If there are any bad eggs, they are on the opposition benches.

Mining risks

International mining risk experts were asked to explain, during a breakfast held in Johannesburg yesterday, why they had underrepresented the threat of labour challenges that have ravaged firms.

In their presentation, Volker Von Widdern, Boris Galonske and Kristina Gerteiser from global consultancy firm Marsh/Oliver Wyman highlighted the risks associated with the mining sector to a room full of risk managers.

Although the speakers highlighted key risks in mining globally, including resource nationalism and skills shortages, the audience seemed to have been wanting pressing solutions.

“The platinum sector is where it is today because of underemphasis of labour threats,” one of the attendees said.

The discussion on the labour issues, which later followed, showed just how risk managers are at their wits end, and not only because costs are rising while both commodity prices and demand have fallen.

The volatility in labour relations, which resulted in the violent wildcat strikes that have continued since last year, goes to show how the sector is in a different space compared with two years ago.

It came as no surprise that after the 2008 global financial crisis chief executives had changed the way they defined the scenarios that could have a financial impact on their businesses, Galonske said.

Surely an addition to the list would be the government’s intervention in mining, as seen at Anglo American Platinum, which backed down on its restructuring plans following pressure.

Galonske went on to say that merely punching probability scenarios into spreadsheets was not sufficient to inform future analysis for risk managers, according to research. Also, due to the strengthening of labour unions, scenarios for potential investors are likely to change, if the 60 percent wage hike that the National Union of Mineworkers is demanding for entry-level workers is anything to go by.

Technology risks

Installing antivirus software to protect your computer system against malicious cyber-attacks is no longer enough, according to Vladimir Udalov, a senior corporate product marketing manager at global technology security provider Kaspersky Lab.

His comments come as the SAPS is reeling from the anonymous hacking of its website, which exposed the personal details for nearly 16 000 whistle-blowers over the weekend.

A report in Business Report’s sister newspaper, The Star, said “hundreds of police officers’ names, ranks and contact details were also uploaded by the hacker, who said the attack was in retaliation for the Marikana shootings”.

Thirty-four people died in clashes between police and striking miners at the Lonmin mine in Rustenburg last year.

A commission of inquiry still has to rule on the police’s level of guilt in the matter. The online criminal activity could render more South African lives at risk.

Yesterday, Udalov said cyber-threats had grown exponentially worldwide and it had “become a huge headache to analyse volumes to threats”.

“Today we are so dependent on information technology (IT), all our customer relationship management databases, enterprise resource planning, financial data is stored using IT and we interact with customers using social media. Antivirus alone can no longer cope with it,” he said.

A report by business continuity provider EMC2 in March revealed 74 percent of local firms doubted that they could fully recover data lost in a disaster.

Udalov has raised application whitelisting, as opposed to blacklisting, which is a trend IT managers would want to latch onto sooner rather than later, in addition to their use of antivirus software, if they had not done so already.

Similar to how the human body antibodies recognise and build up resistance to unwanted intruders, IT systems recognise whitelisted software, which is considered safe to run, and blocks all other programs.

Edited by Peter DeIonno. With contributions from Donwald Pressly, Dineo Faku and Asha Speckman.

“One of the root causes for low labour productivity is sustained underinvestment in our manufacturing base.”

How is South Africa doing in manufacturing productivity? “Badly,” says Professor Justin Barnes, the chairman of Benchmarking and Manufacturing Analysts SA. The topic of labour productivity is familiar; it trips us up in the streets, bombards us in the news and frustrates us all at work. But despite that, the bigger picture of productivity, including capital, manufacturing and the economy as a whole, is less talked about and widely misunderstood.

There is no globally accepted standard to measure productivity, but the most commonly compared indicator reverts back to labour and is calculated as the value of output minus materials, divided by the quantity of labour. Effectively, productivity in the economy is measured by the cost of turning materials into output, divided by the number of workers it takes to do so. Some expert studies put local labour productivity as low as 10 percent to 20 percent.

But as Barnes explains, using labour productivity as the leading indicator leads to distorted results. All firms comprise three factors: labour, capital and material use. Productivity depends on the effective use of all of them and measuring productivity in reference to only one can mislead.

Labour productivity, for example, can decrease due to factors entirely unrelated to labour. Barnes uses the example of a factory that does not invest in maintenance or replacement of its equipment. After 10 years of using the same machines they simply do not produce what they did before.

More labour hours are used to compensate for the fall in production and the result is that there are more workers producing the same amount of goods.

“One of the root causes for low labour productivity is sustained underinvestment in our manufacturing base,” says Barnes. Couple this with South Africa’s poor track record on research and development and it is not just labour, but also the rug pulled from under them that is the problem. Labour is not using capital properly as the capital is often not in a fit state for use.

Another major problem in South Africa is the increasing overhead costs relative to competing economies. The past few years have seen significant increases in the prices of factory rentals, electricity and water. Another factor is the disproportionate expense of managerial salaries relative to other comparable economies.

To incentivise them to retain their skills in South Africa, middle- to high-level managers demand a certain quality of life that service delivery has not kept up with.

They do not make use of public transport, they send their children to private schools, employ security firms to maintain their safety and subscribe to private medical plans. They then demand the salaries to afford this lifestyle and firms happily pay due to the shortage of skilled labour.

All of these factors drive up costs and decrease competitiveness and productivity of South Africa’s resources and industries.

Engaging with productivity in South Africa is more complicated than simply making people work harder with better skills. It is a holistic challenge of system management and starts by understanding the foundation and structure that supports the labour hours being invested into it.

Conversation around local productivity is channelled towards one player: labour. A more constructive approach would be to focus on the interconnectivity between players: capital, labour and materials and question where the links are broken and where better interaction can take place.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision-Making course. Follow him on Twitter @PierreHeistein.

When Michael Jordaan steps down as chief executive of FNB at the end of this year.

When Michael Jordaan steps down as chief executive of FNB at the end of this year, he will wrap up a decade at the helm of one of the country’s biggest banks. He is set to be replaced by Jacques Celliers, a member of the FNB executive committee.

In some ways 45-year-old Jordaan is a different banking leader. His almost 30 000 followers on Twitter, the social networking and microblogging service, serves as a case in point. I would not be surprised if this is the largest Twitter following of any chief executive in South Africa.

However, being different would make sense as Jordaan heads an organisation recently awarded the title of being the most innovative bank in the world.

During a leadership conversation about three years ago, I described him as follows: he possesses fortitude, courage, is not afraid of the unknown, believes a leader should be himself, is authentic, asks for feedback about himself specifically, believes in situational leadership – letting the best person take the lead – and surrounds himself with the best.

He explains more: “You surround yourself with people who are better than you; if you can do that, that’s half of it. Together you agree on what the goal is, where you’re going and then you must largely get out of their way. You can’t get good people and then frustrate them and micro-manage them, just get out of the way.

“And then, if you have made the right decisions, people tend to surprise you. It’s the most amazing thing.”

Of course, getting out of the way does not mean he disappears completely off the scene.

“You set challenges, you question, you debate intensely, but intentionally, you never tell, you just challenge people.”

Good people are inherently proud, they want to do well and want to achieve, and so “wonderful things happen”, Jordaan explains.

On reflection, his basic leadership philosophy has not changed over the past years. However, he comments: “Maybe I have changed. Over time you can relax a little more, things become clearer and you become a little more self-assured about letting go.”

And he does not feel a need to prove himself to everyone, as a younger chief executive may tend to do. Because of this he says: “You’re happy for anyone else to also get the credit because they deserve it and then people perform even better.”

Jordaan has continued down this road and he and his team have taken FNB from strength to strength. For him the ultimate achievement has been the recent accolade given to FNB as the most innovative bank in the world. It is quite an accomplishment when one considers management consciously set out to differentiate FNB through innovation more aggressively, soon after Jordaan became the chief executive.

Of course, they had resistance to this vision when the global banking crisis struck back in 2008. He explains: “We took a dip during that crisis, but then we challenged everything. We said to ourselves, bankers are either in denial or behind the curve and we want to be neither. At the time we relooked at everything completely: business model, positioning, cost structure, where the market was going.”

In short, the team realised the bank could no longer just be a beneficiary of the economy; it had to go out there and grow market share.

First they wanted to make sure their existing customers were happy, before attracting new ones. The bank cut fees, lowered prices.

“In the midst of the crisis we did what most companies don’t do: we actually lowered prices,” Jordaan says.

Then the bank went to the market aggressively, telling new prospective cutomers how much money they could save by joining the FNB stable.

As Jordaan states: “That’s a very tough thing to do. Had there not been a crisis, we may not have taken the type of decisions that we did.”

His key message is: it takes time to achieve any prestigious accolade, especially when it needs to happen on the back of a culture change. And there will always be resistance on the road to significant achievement, but this very resistance could turn out to be a friend.

The decision to take innovation to another level came alive at one of the first strategy off-sites soon after Jordaan became chief executive. After two intense days the team arrived at what seemed to be the final plan: vision, mission, measurements and the whole package.

Jordaan says: “All I wanted to do was to go have some red wine with everybody.”

But one team member challenged the final product, saying it was not strong enough, that it was boring. One can imagine the individual concerned was not too popular. But the team listened, probably because the leader was willing to do so.

The observation was that what would set them apart would be their culture, which had to be one of innovation. And this is what they did.

Another message: team members must feel they can challenge at any stage of the strategy crafting process, and the process and leadership environment should allow for this. Why? Because the birth of a great idea or essence of a winning strategy can be born or dismissed in a moment. And for this to happen it means there must be a very high level of trust within the team.

How did the bank achieve this innovative culture and consequent global recognition?

As is almost always the case, the answer is simple, but the doing takes discipline, focus and endurance. And in my view the leader always remains the kingpin, the heart, the driving force, hence the reason for a leader to remain in the seat for as long as it takes, within reason, of course.

And he adds: “In our case, we kept at it, we learnt along the way, we made mistakes and then you just tweak it and tweak it until it becomes better.

“Our strategy hasn’t changed since I’ve been around. Our structure has barely changed. This is our strategy and we’re sticking to it.”

In essence they told people that innovation is important. Jordaan says: “It sounds very obvious: you’re not going to get innovation unless you’re saying that innovation is important. For example, how many companies in South Africa have somewhere in their strategy or mission or values, the word innovation? Very few.”

Also important is to measure innovation. How many companies actually do this?

Jordaan believes there are companies in the world that do that, but “if you don’t tell people it is important and then measure it, then it doesn’t happen.” And then, for innovation to thrive, an empowering culture is essential. To achieve this takes time.

“That can take time,” he affirms. “This is where it’s important how leaders behave. Your behaviour has to be incredibly empowering.”

FNB is fortunate in that Jordaan’s style and matching behaviour is naturally empowering and this cascades over time, the key word being time.

Jordaan explains further where corporates get it wrong in his view: “People must be able to take risks and make mistakes.” He believes that organisations grow large and start bureaucratising, systematising, often putting in place necessary rules and processes, mostly to minimise mistakes.

While this may be good it also stands in danger of becoming a barrier to an empowered employee and culture.

As he explains: “It’s very important if somebody suggests a great idea and we all debate it and agree to give it a go and then it doesn’t work out, that that person is not taken to task for it. It sounds obvious, but I think it is very difficult for a lot of companies to allow this risk pattern to actually happen.”

At FNB the team realised the world was changing so fast, and that technology was changing the world so quickly that the risk of not innovating was bigger than the risk of making mistakes along the way.

This does not mean they condone silly mistakes or careless behaviour. Together with encouraging innovative ideas they also encourage the principle of “don’t fly solo”.

Anyone who comes up with a great idea is encouraged to discuss it with other people, “just like a pilot who is about to fly will first log a flight plan, that’s what you do so people know where you’re going, where you’re going to land so that if you don’t land they know where to go look for you. So, we say, whatever idea you have, don’t fly solo. Internalise it, kick it around, often it becomes better in that process and then you can go out and do it. It’s about taking calculated risks, and many of them.”

Finally, “recognise and reward people who have innovated, make them heroes”.

FNB is known for handing out prize money that borders on ridiculous. In essence the bank puts its money where its mouth is.

Every single year the bank just adds more and more innovations and as Jordaan says: “Right now we are in this wonderful phase where there is a great pipeline of innovations happening and it’s a system that is building up momentum. I can’t tell you how much fun it is to be at the helm of a system now that looks after itself.”

Of course, competitors copy these innovations. The question is, do they always understand exactly what is behind each innovation? And as Jordaan says: “More importantly, there are hundreds of innovations that are internal only, that’s not visible to the public. Ways in which we do things and you can’t copy a culture, I’m convinced of that. It takes a very long time.” He is correct in this assertion.

FNB has secured the innovation space, not only in the banking sector but in general.

It almost leaves its competitors with no alternative but to strive to occupy other spaces by way of branding, perhaps at their peril when one considers the strategic need for banks to innovate in these difficult times. And remember that an innovative culture is a reflection of an empowered culture, which is an essential ingredient to a successful bank or any large organisation.

Being a “different” leader, Jordaan has served FNB and the South African corporate landscape well. He will leave an indelible mark, indeed.

Adriaan Groenewald, a lead contributor to the BR Leadership Platform, is a leadership expert and the managing director and co-founder of Leadership Platform (www.leadershipplatform.com or follow him on Twitter: @AdriaanG_LP). Send comments to adriaan@leadershipplatform.com or to Business Report editor: ellis.mnyandu@inl.co.za

Full marks to the Public Investment Corporation (PIC) for taking its role as a responsible investor seriously and telling the emperors on all those remuneration committees that they are wearing no clothes.

Full marks to the Public Investment Corporation (PIC) for taking its role as a responsible investor seriously and telling the emperors on all those remuneration committees that they are wearing no clothes.

The PIC, which manages R1 trillion on behalf of the Government Employees’ Pension Fund, has just updated its record of voting at annual general meetings.

The update reveals that more than 50 percent of the companies that held annual general meetings in the six months to the end of March did not provide sufficient information for the PIC, as a shareholder, to understand why executives were being paid what they were being paid.

Generally what they were being paid involved enormous amounts of money; now it is apparent that not only were the sums enormous, they were incomprehensible.

As anyone who has spent time perusing a remuneration report will tell you, these documents are not for the faint-hearted.

They are dense and borderline incomprehensible to anybody who has not been involved in stitching them together. Indeed far more surprising than the fact that the PIC “outed” more than 50 percent of the companies was that it didn’t “out” closer to 90 percent and also that so many other institutional investors voted in support of these incomprehensible documents.

The situation fuels a suspicion that most of the members of pay committees have little appreciation of precisely how much wealth they are bestowing on their executives.

Executive remuneration remains the most egregious example of self-dealing that is enabled by a listing on a stock market. No other supplier of goods or services is given the sort of blank cheque that is the hallmark of a package for the executive of a listed company.

Consider what is happening in the current weak environment. Did anybody seriously think that just because a company’s profits were down, the executives, who quickly became addicted to large and increasing amounts of remuneration, would accept a cut in pay?

That never looked likely to happen. When profits boomed, for reasons such as the Chinese wanting to build to eternity or the government increasing social grants, executives took the credit and were awarded tens of millions of rand.

When profits went into decline, because the Chinese stopped building or Americans overdosed on subprime rubbish, executives pointed out that they could not be held responsible and so they were awarded even more tens of millions of rand for coping with the tougher conditions.

The biggest challenge for remuneration committees these past few years has been how to pay their executives more money while having to report weaker profits.

Altech chief executive Craig Venter’s decision to accept a pay freeze and to forgo his bonus at a time when there was no real earnings growth and the share price was trading at its lowest level in years made headline news. In a free market system that prides itself so much on efficiency and its ability to link risk and reward, why should this not be taken for granted?

Perhaps because it is so unusual to see an executive’s remuneration package being cut? Absa’s much-reported executive pay cuts look to be more sleight of hand than reality. Gold Fields’ Nick Holland was awarded a hefty bonus despite the gold producer’s dismal performance and the slump in the share price because things were not as bad as they could have been.

Cuts in basic pay can always be made up through a complex bonus system, or better still, the long-term portion of the share option rewards. Recall that “long term” in the corporate world is usually defined as three to five years.

What better way to reward an executive who has overseen a collapse in his firm’s share price than to issue him with a whole load of share options at the depressed share price. He can then sit back and watch as the market and other external forces lift the share price to new highs and claim credit for the remarkable turnaround.

Now we are to believe that a few of the executives at the top of major global companies have left because the poor, sensitive creatures cannot cope with the stress of the job. The notion underpinning executive remuneration, that the health of a company is entirely reliant on one individual, was always flawed.

But the cause of early retirement probably has much more to do with the fact that executives can now afford to retire much earlier than they previously could.

This afternoon, the debate on the Gupta family is to be held in the National Assembly.

This afternoon, the debate on the Gupta family is to be held in the National Assembly. The focus of the debate is likely to fall on what role members of the family played in persuading vast state resources to be deployed in the interests of their recent wedding – and who in the state administration was persuaded to open doors to the family.

However, a sideshow is likely to be a focus on the vast Gupta business interests with the government. It is understood that in the 2012 financial year, some R75 million in state advertising – from state-owned enterprises through to departments and the Government Communication and Information System (GCIS) – was spent on the family-owned newspaper, The New Age.

Business Report asked Phumla Williams, the chief executive of the GCIS, how much advertising spend was directed towards the newspaper in the past two financial years. She emphasised that GCIS’s spending did not include spending by departments or by state-owned enterprises.

The GCIS in 2011/12 “spent a total of R14 912 189 on both electronic and print advertising. Of this amount R2 861 314, about 19 percent of expenditure, was spent on the New Age.”

In 2012/13, the GCIS spent a total of R16.2 million on print and electronic advertising. Of this, R1 436 311 was spent on the New Age. That works out to almost 9 percent. Not bad for a newspaper for which there seems to be little evidence of circulation figures or readership. Most of its copies are delivered free of charge.

Communications ministry

Communications Minister Dina Pule has promised to task the Independent Communications Authority of SA (Icasa) to demand greater transparency on voice, SMS and data pricing and to issue a regulation on the market definition for wholesale access to premium television content to increase competition in broadcasting.

Pule also told Parliament, while delivering her department’s budget vote, that she would review the policy of a set-top box control system to make its inclusion in set-top boxes non-mandatory.

This is expected to fast-track digital migration, which has been delayed by haggling between Pule and free-to-air broadcasters e.tv and SABC over who would provide the set-top box encryption system.

The digital terrestrial television network now reaches 80 percent of the population, and the SABC and state signal distributor Sentech are ready to effect the switchover from analogue to digital broadcasting. Sentech will launch a direct-to-home satellite broadcasting service later this year.

Pule, who is finalising a project action plan for connectivity in schools, hospitals and other state-owned facilities, will later in the year present four legislative amendments: the Icasa Amendment Bill, Electronic Communications Act Amendment Bill, SA Post Office Amendment Bill and the Postbank Bill.

The new broadband policy will be tabled before the cabinet next month, which will enable the finalisation of the radio frequency spectrum allocation process.

Pule said the department would transfer R1.5 billion, or just over 70 percent of its budget, to state-owned companies under its jurisdiction.

In four months the SABC would receive R222m, the balance of its R1 billion government guarantee loan.

For someone whose future as minister is uncertain, and according to public sentiment actually should be over, Pule sure has a voluminous to-do list.

Medical innovation

The mandate of the newly established Innovative Pharmaceutical Association SA (Ipasa) to empower research and development (R&D) promises to go a long way towards building South Africa’s capacity for medical innovation.

For a company to become a member of Ipasa, it must conduct its own R&D. The association, which was officially launched yesterday, has committed itself to represent only those pharmaceutical companies dedicated to exploring, developing and bringing innovative medicines to the South African market.

Ipasa was born out of a collaboration between two local industry associations: the Pharmaceutical Industry Association of SA (Piasa) and Innovative Medicines SA (Imsa).

This does not come as a surprise, because Imsa has always been about innovative medicines.

With 24 member companies, including Pfizer, Novartis and Bayer Healthcare, the association could be very influential and capacitated to make the boldest moves.

There is already evidence that the African population does not always respond as well as other populations to medicines developed elsewhere. A Health Equity Symposium in Boston earlier this year showed how Africans responded much more positively to medicines made out of indigenous African plants.

If R&D funding in the continent were to get a boost, it is clear that innovative medicines would be taken to the next level.

The national Department of Health took a step forward in this regard this year when it announced an allocation specifically for medical research in its budget vote.

The department set aside R90 million in the 2013/14 financial year, R100m in 2014/15 and R250m in 2015/16 for the Medical Research Council to strengthen its capabilities and infrastructure as well as to support partnerships on high-priority diseases with development partners such as the Gates Foundation.

Ipasa member companies share a view that innovation-based medicine is advancing and this is what prompted the establishment of this unified representative industry body. Ipasa will replace Piasa and Imsa as South Africa’s representative at the International Federation of Pharmaceutical Manufacturers & Associations.

Edited by Banele Ginindza. With contributions from Donwald Pressly, Asha Speckman and Londiwe Buthelezi.

Last week, thousands of mourners gathered at the remains of the Rana Plaza factory complex in Bangladesh to pray for the 1 127 people who died when it collapsed on April 24.

Last week, thousands of mourners gathered at the remains of the Rana Plaza factory complex in Bangladesh to pray for the 1 127 people who died when it collapsed on April

24.

The poignant remembrance of the victims of this dreadful tragedy came amid a succession of actions and reforms announced by the Bangladesh government, local factory owners and some international clothing chains, whose products were being stitched by the largely female workforce crammed into five factories inside the Rana Plaza building.

The reforms announced so far include the immediate voluntary closure of a number of other factories believed to be unsafe; a lifting of restrictions on forming trade unions in most industries; the establishment of a new mechanism to guarantee a reasonable minimum wage for garment industry workers; and the decision by a number of major names in the international fashion and clothing industries to sign, by May 15, a binding agreement to improve fire and building safety conditions in their Bangladeshi contractors’ workplaces.

These welcome reforms showed a belated realisation, both locally and internationally, that this was a catastrophe that was totally preventable. Building regulations, worksite safety regulations – a whole web of protective rules have been routinely violated in Bangladesh’s garment sector, despite public knowledge and debate.

There have been plenty of advance warnings about worker safety in the country’s garment industry as a whole, with more than 120 lives lost in separate factory fires just in the past six months.

Together with their civil and political rights, all human beings, no matter where they live, have economic, social and cultural rights. These are recognised and protected in international human rights instruments, and include the right to life, to a standard of living supportive of a life in dignity, and to a range of workers’ rights, including the right to fair wages, to safe and healthy working conditions, to join and form trade unions, and to strike. The measures taken so far are encouraging, and may mark a turning point for protection of Bangladesh’s garment workers.

But they should be seen as the beginning, not as an end result. It is vital that swift action is taken to empower trade unions and overhaul the garment sector, with factory upgrades and a far more stringent and corruption-proof approach to oversight and inspection.

If the changes turn out to be cosmetic attempts to appease public anger, an effort to buy time until the impact of the disaster fades and the cheap-as-possible approach can be resumed, then more disasters will inevitably occur.

By the midnight deadline on May 15, a total of 37 international companies, the majority of them based in Europe, using more than 1 000 Bangladeshi garment factories, had signed the Accord on Fire and Building Safety in Bangladesh.

This is an important and in many ways unprecedented agreement that includes strong governance and accountability elements, which mean the accord can be legally enforced in the countries where the international companies are based.

It provides for inspections and other oversight mechanisms, including regulated remedial actions to make factories compliant with building, fire and electrical safety standards and fire safety training, health and safety committees with trade union representatives, and public reports.

Some major retailers, especially in the US, have chosen not to sign the accord, but have pledged to perform their own inspections. The spotlight will be on them to ensure they carry out these pledges in a credible manner.

These issues are not solely linked to Bangladesh, as we were reminded just this week when the roof of a shoe factory in Cambodia collapsed, killing three workers.

Two years ago, the UN agreed on a series of Guiding Principles on Business and Human Rights that provide a framework for what needs to be done by businesses and governments everywhere; governments must take appropriate steps to prevent, investigate, punish and redress abuse of workers’ rights through effective policies, legislation, regulations and adjudication.

Corporations must do human rights due diligence to prevent and address human rights abuse. Victims of abuse must have access to effective remedy. Perpetrators must be prosecuted. And the processes of supervision and oversight must be freed from unhealthy and ultimately toxic and dangerous ties to special interests.

The best way to honour the victims of Rana Plaza is to ensure such a tragedy never happens again.

South African-born Navi Pillay is the UN High Commissioner for Human

Rights.

Across the country tens of thousands of families have been prevented from working over recent weeks.

Across the country tens of thousands of families have been prevented from working over recent weeks. Apart from the chaos on the platinum mines, this deprivation is due to the conscious action by unions to paralyse an essential service in the economy: transport.

Transport is not an “essential service” in the legal sense, but tell that to the households whose children’s education is falling behind and whose breadwinners must either pay exorbitant taxi fees or not earn a living for weeks on end.

In constitutional theory there is great emphasis placed on the division of powers between the executive, judiciary and legislature as an essential bulwark to the rule of law. Great legal battles have been fought over seemingly minor procedural points merely because the eventual impact could erode this division.

Perhaps it is time to consider the separation of powers between the government, labour unions and business. The trend is to give an ever greater share of power to unions for fear of them further destabilising necessary services.

The pertinent question is: Who is driving the demands of the unions, the workers themselves or the union leadership?

A recent SA Chamber of Commerce and Industry survey representing more than 830 employees showed there is a clear correlation between unionisation levels and the frequency of strikes.

Businesses with zero unionisation levels had a 55.6 percent probability of not experiencing a single strike in the past three years and a 22.2 percent chance of one strike occurring. Companies with near universal unionisation levels have a 66.7 percent chance that there was a strike every year for the past three years. As soon as a firm has any level of unionisation, there is a near certainty that strike activity will occur once every three years.

Labour unions have firmly entrenched themselves as the aggressor among the august circle of social partners. They would not hesitate to issue attacks verging on libel against the social partners at the slightest hint of opposition. They frequently threaten to bring the country to its knees.

This is not the behaviour of a responsible partner, but that of an institution that is increasingly reverting to extreme measures to protect its interests. But business and the government are also to blame for enabling this behaviour.

The business community has for years been at pains to accommodate and co-operate with labour in order to find workable solutions. The emphasis on a diplomatic exchange of ideas by business has been interpreted as a weakness by unions.

We know individuals left destitute because of some ridiculous demand for a double-digit wage increase. The severity of the actions of unions has passed from economic concerns to moral outrage. If the nationalisation of mines and other resources are fair game, then why should the rights of labour unions not be revaluated.

The risk of systemic chaos is significantly lessened if labour unions in network services like transport are restricted from engaging in strikes.

George Bizos once said that when someone argued the constitution should be changed to allow the death penalty, then property rights could just as easily be dropped in order to fully redistribute wealth.

The same can be said for calls to nationalise property: if unions are so sure of the wealth creation potential and democratic qualities of nationalisation, then what is stopping them from waiving some of their rights for the benefit of the country?

Pietman Roos is a policy consultant at the SA Chamber of Commerce and Industry.

It emerged during a briefing with Energy Minister Dipuo Peters last week that she had recently raced off to Pennsylvania, the scene of a measure of controversy over the extraction of tight gas.

It emerged during a briefing with Energy Minister Dipuo Peters last week that she had recently raced off to Pennsylvania, the scene of a measure of controversy over the extraction of tight gas. The only problem was that the minister couldn’t remember which small town she had visited “on the coast”, but she did remember that the whole operation was run by a woman.

Shale and tight gas is extracted at great depths below the earth by tunneling down vertically a few kilometres before blasting – with a mixture of water and chemicals – a number of legs laterally through the rock to extract the trapped gas.

After the minister was asked which town she had visited and whether anything she had seen had changed her positive attitude about the form of gas extraction, a sidekick said the town had been Marcellus.

The minister, however, didn’t appear to witness anything that turned her off the extraction process, which critics say has been responsible for contamination of water sources underground.

Peters was the guest of the state government but had also met industry representatives, including Shell. She hoped to meet representatives of community groups soon. Peters participated in the Group of Friends on Sustainable Energy for All discussion at the UN.

She also attended the Bloomberg New Energy Finance 2013 Summit in New York City. It was previously reported that she would visit “shale gas infrastructure and sites” in the Pennsylvania area.

Her department reported that following the lifting of the moratorium by cabinet, more research was required to inform South Africa on the potential and proposed development path “of this new energy source” in the Karoo.

Marcellus is the name of the geological layer of shale spanning Pennsylvania and West Virginia which is blasted in fracking. It is not a town in Pennsylvania, but there is a town of that name in Onondaga County, New York state.

Abil

The idea that the situation around African Bank (Abil) represents the beginnings of South Africa’s very own sub-prime crisis and that it will similarly end in a crisis for our financial sector makes for exciting deadlines, but is far from being an accurate reflection of the situation.

The important facts to remember are that Abil is making profits – and lots of them. In the six months to end-March it made R1 billion of profits. It is only five to six times leveraged, which is negligible compared with the sub-prime operators.

The 35th and last slide in an otherwise grim results presentation highlights just why Abil is a “strong business”.

Apart from the R1bn, which is equivalent to a 14 percent return on equity and compares with funding rates that have declined to 8.6 percent from a peak of 11.4 percent in 2009, it is also compliant with the rather tough requirements of Basel III.

So the Reserve Bank is absolutely right to say that the local banking sector “remains sound, well capitalised and profitable”.

But despite all of that, the government must be a little bit anxious; so too must Abil’s shareholders and funders be anxious as well as the shareholders, funders and management of all entities that rely on consumer demand, whether it’s for goods or money.

The issue is whether what is playing out in the unsecured lending market represents something of a hangover from a period – the last 18 months or so – when too many players piled into the market. If it is just a hangover then a period of calm consolidation should sort out the matter.

However, if it is something of a more structural nature then we could face a rather grim downward spiral of economic activity as lenders rein in their funds, putting more pressure on consumers, which in turn means pressure on retailers… and down and down the circle goes.

Mining

The ANC plans to unify and strengthen the National Union of Mineworkers (NUM) after the wildcat strike that shut down Lonmin, the world’s third-largest platinum producer, in Rustenburg last week.

Following a meeting of the National Executive Committee held over the weekend, the ANC spoke against the attacks on NUM. It would hold talks with officials from NUM and the South African Transport and Allied Workers Union (Satawu) to hear their challenges with the aim of strengthening both unions, it said.

“The meeting further noted the recent attacks on NUM and Satawu is in fact an attack on Cosatu as a federation on the congress movement as a whole.

“The ANC resolved to develop a comprehensive programme of engagement with individual unions,” Gwede Mantashe, the ANC secretary-general said yesterday. Mantashe also said unions outside Cosatu had a right to exist. The ANC can forget about finding an overnight solution to the complex labour challenges.

Calls by ANC deputy president elect Cyril Ramaphosa, for Rustenburg to be reclaimed by NUM during a May Day rally, were also irresponsible, seeing that there is tension between the Association of Mineworkers and Construction Union (Amcu) and the NUM.

The emergence of Amcu is no doubt a dilemma for NUM which was a majority union across the mining industry, through a 50 plus 1 percent recognition agreement with firms.

The rapid growth of Amcu in the platinum belt has been a nail in the coffin of NUM, the oldest union in the platinum sector. NUM shop stewards have joined the militant Amcu plant by plant. Last week Lonmin finally recognised Amcu after months of hesitation.

Amcu had 70 percent representation at Lonmin, it was recently announced. It represents 54 percent of the lowest-level employees at Impala Platinum, the world’s second-biggest platinum producer, while NUM had 8 percent.

Edited by Banele Ginindza. With contributions by Donwald Pressly, Ann Crotty and Dineo Faku.

The property stocks listed on the JSE provide medium- and long-term investors with an interesting array of choices.

The property stocks listed on the JSE provide medium- and long-term investors with an interesting array of choices. These entities give investors the opportunity to partake in a diversified portfolio of expertly managed immovable property. Listed property can help investors find a way to beat inflation through growth of the capital investment supported by rental escalations contained in leases.

There can be no doubt, however, that the property sector of the JSE has boomed over the past 10 years. This is due largely to the dramatic fall in interest rates over this period. Low interest rates tend to positively affect consumer spending, which in turn directly benefits owners in the property sector. When interest rates are high and times are tough, companies will generally not take more office space, downsize and in the retail sector, new shops are scarce. This changes the minute the interest rates start to drop.

The market capitalisation of the property sector has grown from R41 billion at the end of March 2003 to R335bn at the end of the first quarter this year. The three biggest companies are Growthpoint with a market capitalisation of R35bn, Intu Properties (formerly Capital Shopping Centres) R34bn and Redefine Properties R21bn. Over the last year the FTSE/JSE listed property index gave a total return of 35.9 percent and in the first quarter of 2013 a return of 9.14 percent. In the past three years we’ve had 15 companies coming to the market. We now have 44 property companies listed, which accounts for 3.9 percent of overall JSE market capitalisation. The average appreciation in price for real estate unit trusts was about 35 percent to 40 percent for the year to date and 75 percent to 80 percent for the past three years.

The JSE’s implementation earlier this month of the Real Estate Investment Trust (Reit) structure will usher in a new era for the listed property sector and this should help maintain its growth profile.

In July last year, I wrote a column on how, after the financial crisis in 2008, the world was moving away from fragmented, uneven risk management to international best practice. The Basel III regulations regarding bank liquidity are a good example. The new Reit structure is a big move in this direction for the listed property sector. Now international performance comparisons will be easily made and the investor protected within an internationally defined and regulated industry.

More than 25 countries make use of the Reit model including the US, UK, Australia, France, Belgium, Hong Kong and Singapore. Spain and Ireland were badly affected by real estate crises that damaged their banking systems and plunged their economies into recession. They are introducing the Reit model as an effective conduit to attract domestic and international capital and so underpin their banking systems that are laden with property debt.

In South Africa, after six years of consultation with stakeholders, the change follows the formal announcement of Reit tax legislation published on October 25, 2012 by the Treasury. Under this new legislation capital gains tax is no longer payable on disposal of assets. Reit profits are distributed pretax and then taxed in the investor’s hands.

To comply with JSE Reit listing requirements, a company needs to own property worth at least R300 million; have a total debt to asset ratio of no more than 60 percent and derive 75 percent of its income from property rentals. It must also distribute at least 75 percent of its profits to its investors each year. Moreover, the company must not invest in derivative instruments that are not in the ordinary course of business and must have a risk policy that is monitored by a committee of the board.

I can foresee a number of benefits emanating from the new Reit:

n It will grow our listed property market as there will be increased demand for our property shares.

n Many international asset managers have mandates to invest only in property funds with a Reit structure, therefore we should have increased foreign investment particularly into the larger listed property stocks which have more liquidity. If all listed property companies convert to Reit we will be the eighth largest Reit market in the world and will be automatically included in foreign funds tracking global Reit indices. For example, foreign purchases in our bond market increased when we were included in the Citi Group’s World Government Bond index in October.

n The Reit structure enhances property investment for large institutional investors and pension funds.

n As a Reit pays no capital gains tax on the disposal of properties the full proceeds of any sale is reinvested in the company.

n Reits trade like regular shares and can be purchased through a stockbroker.

n Reit shareholders will not pay securities transfer tax on buying or selling Reit shares.

n There is a certainty that at least 75 percent of profit is paid out.

People ask me why our property market is so high at present. As I read the situation, interest rates are at record lows and quantitative easing programmes in the US, Japan and other central banks have pumped enormous liquidity into the markets. A lot of this liquidity has found its way into property investment.

But there are pressures on the market. These include sluggish economic growth, a lack of development opportunities in prime nodes where land is limited, operating costs are increasing and municipalities are in the process of revaluing commercial property in order to adjust rates and taxes. As an aside, I believe golf and sporting clubs are worried about this rerating which could lead to unsustainable rate increases. Any prospective investor in the property sector should bear in mind that with interest rates at record lows the next broad move could be upwards.

The recent hostile takeover bid by Bidvest for Adcock Ingram led me to muse over the word “hostile”. In many of these bids the word hostile certainly doesn’t apply to the shareholders who often appreciate the benefits that would accrue from the takeover. Thus the word hostile most frequently applies to the “top brass” in the target company because, from my experience, they know that if the takeover is successful, it is likely that many of them will all be out of a job in a few years.

There are numerous defensive measures available to companies to defend themselves against hostile takeovers. These are collectively referred to as “poison pills” or as “shark repellents”.

One of the most common poison pills is a provision that allows current shareholders to buy more shares at a steep discount and a more drastic method involves deliberately taking on large amounts of debt.

In my opinion one of the problems of a bid being considered hostile is that the bidder is unable to conduct extensive due diligence into the affairs of the target company and is limited to only publicly available information. Banks are often less willing to back a hostile bidder because of the relative lack of information on the target company.

Complex legal wrangling seems to be the most common poison pill. This often leads to the suitor becoming discouraged with the time executive staff have to allocate to the acquisition and the expenses that are incurred. In a market like South Africa, matters become complicated when both companies could have the same bank and the same asset managers.

To my mind, the possibility of a takeover, hostile or otherwise, keeps directors and management on their toes. The most successful takeovers seem to have been in the property market and look how well this sector is doing. The vast majority were, however, friendly.

Humphrey Borkum is chairman of the JSE.