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The first decade of the 21st Century has witnessed its fair share of blunders that have affected South Africa’s business sector. None of those we list have been fatal – not yet at least. However, in most cases their consequences will be felt not only in the current decade but well beyond it as well. There’s been a fair mix of poor decision-making in both the public and private sectors and in some cases the two have been immeasurably intertwined.
The big difference between corporate blunders and those made in the political sphere or public service is that the consequences of the former are measured almost immediately and remedial action usually taken more quickly and effectively than the latter. Companies that fail to deal with life-threatening blunders are removed from the system, which can be painful, but the market has proven to be a considerably more efficient mechanism at wiping out idiocy than politics ever has.
Mistakes happen all the time: strategic miscalculations and errors of mistimed exuberance or conservatism can be equally damaging. Hindsight is the perfect science. However, we believe those in positions of authority are paid to know better and they – like the victims of their decisions – should live with the consequences of their actions.
Not included in our list – for reasons of space but no less wanting in terms of their blunder status – include:
* Bloated government and a rapidly expanding, increasingly inefficient public service – costing taxpayers twice what it did five years ago.
* Increased wealth taxes in an environment where there’s little growth to drive sustainable jobs.
* A lack of policy certainty: no sooner does Government make firm policy commitments than a member of the “alliance” sows confusion.
* The failure to create an enabling environment to drive growth that will create jobs and drive taxes.
* Cipro and its inability to manage the companies register.
* The Estate Agency Affairs Board: fraught with infighting and a failure to administer SA’s property brokers.
* The small banks crisis and the failure to effectively broaden access to financial services while allowing the continued dominance of the “Big Four” to run this country’s banking system with apparent impunity.
* Coega: the development that was to bring a breath of economic fresh air to the windy city is at risk of turning into a considerable white elephant.
* Corruption: it seems pervasive and runs seemingly unchecked in the public sector.
* SA’s failure to fully capitalise on the magnificence of our hosting of the 2010 Soccer World Cup.
Finweek ’s ace team of investment writers has identified some of the 21st Century’s biggest blunders from an economic, corporate and political perspective, the consequences of which will haunt citizens, shareholders and executives for the next decade at least. It would be wrong to simply place the woes of the business community on the shoulders of Government. Several large corporations have been perfectly capable of blundering to disaster on their own. Though we don’t mean to pick on the public sector, such is the nature of 21st Century SA that public sector blunders have a direct and often negative consequence on the private sector.
Bruce Whitfield
Power implosion
Princes of darkness
The Blunder
Top of the list: uncertain power supply. President Thabo Mbeki admitted in December 2007 Government made the wrong decision in denying Eskom’s late Nineties requests for Budget to build new power stations. Tony Twine, of Econometrix, says: “The engineering boffins at Eskom had created very clear scenarios 10 years in advance of the problems experienced in 2008 but were deliberately ignored by the Departments of Energy, Public Enterprises and the National Energy Regulator, all of whom were more interested in handing out electricity like political candy than ensuring the candy-making machine could keep up with demand into the future.”
The result
January 2008 saw load-shedding and a warning that Eskom couldn’t guarantee power supply to 138 of its biggest industrial customers. The mining sector – which accounts for one-third of SA’s foreign exchange earnings – was hit hardest. Smelters and mines were either shut or cut back on their operations. Global commodity prices rocketed – and SA is missing the boom. Three years after the crisis Eskom says it’s on track with a R385bn build programme. Business Leadership South Africa warns the Medupi and Kusile power stations won’t be enough, a warning echoed by Planning Minister Trevor Manuel. Eskom says its system is under pressure to 2012 before the first 790MW from the new Medupi coal-fired station come online in April next year.
The solution
You pay more for power. Government has to be bold in crafting, implementing and budgeting for energy plans that will not only meet future demand but also secure the most appropriate, cost-efficient energy mix for the decades to come. While Government argues coal has to be part of that mix because the abundant resource is available underneath SA’s soil, it’s also sticking to its plans to expand nuclear energy generating. Independent power producers (IPPs) are also going to have to be given the right space to enter into and compete in the power generation market.
TROYE LUND
Local government
Municipalities
The Blunder
Government’s failure to intervene successfully when municipalities first began grabbing headlines with political power struggles, crumbling service delivery, financial distress and mismanagement. Idasa’s Judith February says that failure to address increasing malfunction at local government level is probably national Government’s biggest blunder over the past 10 years, because it has the most serious consequences in the immediate term.
The result
Apart from increasing protests about municipal services delivery, local government has become what political analyst Dale McKinley refers to as the “soft underbelly of patronage and corruption” in SA. Government’s latest (2009) report on the state of local government admits it’s underpinned by widespread institutional and delivery paralysis, factionalism, a culture of patronage, fraud and nepotism and financial mismanagement, as well as ineffective and unaccountable politicians and officials. As a result, McKinley says local government can be best described as one of “recurring crisis management with successive rescue packages, grandiose development plans and parachuting promises”.
The solution
Local government elections are happening now. In 2009 President Jacob Zuma acknowledged change wasn’t happening at local government level as rapidly and effectively as citizens expected. Consequently, another municipal turnaround strategy was launched and last year Co-operative Government & Traditional Affairs Minister Sicelo Shiceka signed a delivery agreement with Zuma to implement that agreement, which is about “achieving a responsive, accountable, effective and efficient local government system” by 2014. Municipalities face the twin challenges of extending services to the poor and maintaining quality standards elsewhere.
TROYE LUND
Labour
Inflexible laws
The Blunder
It discourages sustained hiring. While the promise of sustained and “decent” work is being rolled out by the ANC Government ahead of upcoming local elections, the lop-sided nature of SA’s labour force is becoming more apparent. With real unemployment sitting at around 40% and young people (18 to 25) unemployment somewhere between 70% and 80% there are structural problems that need to be addressed. Punishing job creators isn’t the way to go about it.
The result
In the recent Adcorp labour survey, CEO Richard Pike noted that since 2000 SA’s temporary or part-time workforce had grown by 11,9%/year. That’s compared to an average decline of 1,5%/year in SA’s permanent or full-time workforce. Coupled with the global financial crisis – which wiped out 1m jobs in SA – and the cost of doing business rising rapidly due to new business “taxes” (such as the toll road system) the picture looks bleak. Even with the proposed plan to create 5m jobs over the next 10 years that will still leave SA sitting with an unacceptably high unemployment rate as employees work longer due to limited social and financial security coupled with a high “real” tax rate.
The solution
Keeping organised labour happy has long been a “must” for the ruling party, but at some point bold steps need to be taken to stimulate job creation rather than job protection. Industry experts have pointed out technology means jobs are a commodity that can be exported worldwide to the most “business friendly” destinations and that’s an easy step: “Make political rhetoric pro-business”.
Pike has previously pointed out just how much new legislation has been introduced into the business environment to protect labour but no single position or Government department has been tasked with reducing unemployment despite it being a key banter point for politicians chasing votes.
TROYE LUND
Monetary policy
Interest rates
The Blunder
Former Reserve Bank Governor Tito Mboweni, having cut interest rates by a total of 450 basis points in 2003, made the mistake of cutting further in 2004 and 2005. In August 2004, Mboweni lopped a further 50 basis points off the repo rate – and then repeated that in April 2005. On the way back up, he overdid things again. He hiked interest rates by 550 points between June 2006 and June 2008, bringing the prime overdraft rate to 15,5%. The last two hikes in 2008 were regarded as especially heinous, as consumer spending was already in recession, with food and fuel driving inflation.
The result
The cuts in 2004/2005 were a step too far for the Reserve Bank. The rate cuts fuelled an unprecedented consumer boom, with household consumption rising by a whopping 6,9% in real terms in 2005 and an even more eye-popping 8,3% the next year. There was a credit binge that proved very difficult to halt. Private sector credit extension rose by almost 26% in 2006 and – in a continuation of the lagged effects of low interest rates – by more than 21% in 2007. But then Mboweni rudely interrupted the boom with excessive interest rate hikes, pushing household consumption expenditure into recession from third quarter 2008 to mid-2009.
The solution
The remedy is for central bank governors to learn patience. Mboweni was overly gung-ho on the way down and overly gung-ho on the way up. In the process, consumers built up a debt overhang that still influences policy. Banks remain reluctant to grant credit. It now takes bigger declines in the repo rate to achieve the same result. Mboweni’s successor has cut the repo rate by 650 points. Mboweni couldn’t see he was creating a psychology of easy credit and later needed a sledgehammer to stop it: a little patience would have saved Mboweni from a lot of criticism.
GRETA STEYN
Telecommunications
Otherwise engaged
The Blunder
Instead of liberalising telecommunications in SA, the new ANC Government of 1994 adopted the same backward policies as its National Party predecessor. Telkom’s monopoly was retained and no other operators allowed to provide national networks. Putting its own financial interests ahead of those of its constituency, the State also hangs on to shares in Telkom, despite quasi-privatisation of the company, and drives policy that cements its monopoly instead of promoting competition in the market. Neotel wasn’t allowed to get off the ground until 2006.
The result
SA’s telecoms industry was held back more than a decade. Whereas deregulation and liberalisation should have started in 1994, the industry was essentially kept in the dark ages until 2008. New networks that sprang up in post-apartheid SA – even Vodacom and MTN – are reliant on Telkom for connecting them countrywide. The price of telecoms is kept exorbitantly high and competition prevented to protect Government’s revenues from Telkom. Not only are prices high but service is deplorable.
The solution
After 14 years of incompetence in Government’s management of its telecoms policy, the private sector stepped in. A subsidiary of the Altron Group – Allied Technologies [JSE:ALT] (Altech) – took the Communications Department to court. The court ruled in favour of Altech and opened up the market to network operators, allowing them to provision their own networks for the first time. ECNS licences were made available for the purpose and many operators sprang into action building their own networks and cancelling contracts with Telkom. The industry has lots of catching up to do, but finally some price reduction is coming to the market and international cable projects are initiated to better connect SA with the rest of the world.
SIMON DINGLE
Anglo American
Role in BEE
The Blunder
It was in 1996 when Anglo American [JSE:AGL] ’s then silvery, high-handed CEO Julian Ogilvie Thompson announced the winner of the race to buy 34,9% of JCI as part of a broader group restructuring. Former MK operative and Capital Alliance chairman Mzi Khumalo stepped from the shadows to announce his newly created African Mining Group (AMG) would take the helm of one of SA’s oldest mining houses. It was the first in a series of well-intentioned – but ultimately blundersome – black economic empowerment transactions, the effect of which was to create a new uber class of moneyed individuals: the black oligarchy, who also included Tokyo Sexwale and Patrice Motsepe but with little evidence of any trickle-down wealth.
The result
In order to keep its head above water, AMG needed 5% compound growth/year in the JCI share price, having paid 5450c/JCI share – equal to a then massive R2,9bn. That was already pressure. But it didn’t help: Khumalo was out of his depth – and his board knew it. JCI’s price slipped through 3000c/share. The market’s vote of no confidence in that empowerment deal – in which Anglo had preferred Khumalo over Cyril Ramaphosa’s Nail – was bloody and ruthless and catastrophic.
The solution
Khumalo drafted in Randgold & Exploration Company [JSE:RNG] commercial director Brett Kebble to take the helm at JCI. It was an attempt to sandbag a quickly deteriorating board. Khumalo preferred a coal/base metals group; Kebble was keenly interested in reviving SA’s gold heritage with a new gold major. The demise of the Kebble and Khumalo union was obvious as it was painful to behold. JCI was in ruins and Anglo left wondering how it was going to recoup its R2,9bn. Within months, Kebble resurfaced – as he was often to do – with “JCI Gold”. His plans were to consolidate SA’s gold industry and create a new giant. By 1999, the gold price had halved to $252/oz. The rest is history.
DAVID MCKAY
Old Mutual
Globalisation
The Blunder
When Old Mutual [JSE:OML] listed on the JSE at the end of the Nineties it heralded a new era for a stuffy assurance firm that could use its newly won corporate status to expand its influence, first, into the tempting United States market via a London listing that conveniently gave its senior directors a bolthole and source of foreign income before taking on the world. History shows that through a process of shocking timing, overpaying and mismanagement the group ran up corporate costs of more than R100bn.
The result
Old Mutual’s foray sparked other misadventures, particularly to the US, where some of its smaller competitors figured they’d be more nimble. It cost Sage its corporate life and one of SA’s oldest and most respected brands was consigned to the dustbin of corporate failure due to its ill-conceived US adventure. Discovery had the good sense to pull the plug on its Destiny business after pouring more than R1bn into it and continues to chip away at offshore markets – particularly in Britain and more recently in Asia.
The solution
It’s taken a decade for the company under a new board and (mostly) new management team to acknowledge the folly of its earlier strategy. Under CEO Julian Roberts – a former financial director, later head of the group’s mid-noughties acquisition of Skandia of Sweden, to look to consolidate and simplify its massively complex and inefficient group structure. Old Mutual has finally offloaded its US Life operation, part of which once belonged to Sage, and is currently conducting a partial listing of asset manager OMIGSA, while trying to offload Nedbank as part of an ongoing debt-reduction strategy.
BRUCE WHITFIELD
Anglo American
Fiasco Down Under
The Blunder
Anglo had long wanted to increase its exposure to iron ore in Western Australia (WA) but was stymied twice by arch rival Rio Tinto, with the first incident happening in 2000 when Rio Tinto outbid it for control of Australian iron ore junior, North. Anglo tried again when it took over Kumba Resources in 2005, which was in a 50:50 joint venture involving the Hope Downs iron ore project with local company Hancock Prospecting, run by Australia’s richest woman – Gina Rinehart.
Rinehart subsequently pulled the rug from under Anglo American [JSE:AGL] – citing a legal loophole over change of control at Kumba – and teamed up with Rio Tinto instead. Aussie insiders subsequently reckoned the real reason was then Anglo CEO Tony Trahar had rubbed her up the wrong way while Rio’s head of iron ore – the genial and easy going Sam Walsh – followed just the right approach in dealing with the notoriously difficult Rinehart.
The result
Anglo’s expansion into iron ore outside SA was badly delayed, restricting the group to developing its Sishen mine, where growth was subject to rail and port constraints beyond Anglo’s control because those are State-owned. Rio, which owns its own port and rail infrastructure in WA, produced its first iron ore in 2008 from the 22mt/year mine it built at Hope Downs, which it is currently expanding by another 15mt/year.
The solution
Trahar was replaced as CEO by Cynthia Carroll in 2007 and she took a far more aggressive approach, buying control of the Minas Rio iron ore project in Brazil for US$7bn, on top of which Anglo has to invest – at last count – around $5bn to develop the project, which is due to start delivering ore at end-2013. Minas Rio should have very low operating costs. But Rio’s capital costs at Hope Downs have been orders of magnitude lower, with the original mine costing $1bn and the expansion another $1,6bn.
BRENDAN RYAN
The exchange rate
Rand wreckage
The Blunder
Somewhere around 1997/998 a number of leading South Africans worked very hard at making a bid for the 2002 Olympic Games to come to Cape Town. It became known later that the bid committee had used an exchange rate of US$1/R20 to calculate the cost of the games. The actual exchange rate at the time was around US$1/R6-R7. In 2001 the rand weakened sharply and, unlike his predecessor, the new Governor of the Reserve Bank refused to intervene. By December that year the rand was trading at as much as US$1/R13. That was oil on the flames and early in 2002 many a financial manager fancied himself a foreign exchange expert and tried to protect his business against the expected US$1/R20.
The result
At Naspers [JSE:NPN] the experts followed the policy of buying all their liabilities forward in strong currencies for two years. At the same time the expected returns were sold forward in weak currencies for two years. That simple policy had worked well previously, but after 2002/2003 the strong currencies suddenly weakened, while weak currencies, such as the rand, strengthened. At SA Airways, things went even worse – but this time the loss was for the pocket of the poor SA taxpayer. SAA’s former head sold all the airline’s old aircraft on lease and showed a huge profit. That left him with a R300m bonus and he left the country.
The solution
Companies should manage their businesses, not the currency – which is volatile and unpredictable. SAA, like other public corporations, should be privatised and forced to compete for goods and services in the open market rather than have the State as a permanent backstop – regardless of the actions of its management. When she ran Transnet (which “owned” SAA at the time), Maria Ramos said SAA’s management wasted around 50% of its time trying to guess what the future exchange rate would be – and it wasn’t even necessary. By freeing management to run the business of an airline it would force it to manage on the basis of operational risks and strategic imperatives rather than force it to behave like a Government department, with all the ancillary issues that brings.
VIC DE KLERK and BRUCE WHITFIELD
CapitecLment
PSG unbundling
The Blunder
While some companies in this cover story may bristle at our “blunderful” opinions, PSG’s unbundling of its stake in Capitec Bank Holdings [JSE:CPI] in 2003 was a self-confessed mistake. No less a personage than PSG chairman Jannie Mouton admitted that in a recent annual report. Perhaps PSG was a tad concerned at Capitec’s risk profile (and capital requirements) at that early stage of the bank’s development. Although it’s made clear the decision to unbundle the bank should be seen in the context of PSG then being a potential hostile takeover target (purportedly Absa, which did get PSG Investment Bank).
The result
No sooner had PSG Group [JSE:PSG] set free its holdings in Capitec than it became apparent – especially to the bigger punters on the market – that this little bank had latched on to a very workable (and very profitable) low-cost banking model for the masses. More importantly, Capitec wasn’t going to lack for funding as regards its ambitious development/expansion plans.
The solution
Full credit to PSG Group [JSE:PSG] for swallowing its pride and going about the arduous task of re-building a holding in Capitec – a development helped by the dismantling of PSG empowerment partner Arch Equity (which fortunately had retained a significant minority stake in Capitec). The truth is, PSG did initially own 58% in this successful banking venture compared to the 34,9% it now owns. But the re-bundling exercise has proved very profitable, with Capitec’s share price catching fire over the past two years. Finweek doubts PSG – despite the strong run in Capitec’s shares of late – will be in any way inclined to entertain thoughts about unbundling or selling out. Then again, the big banks – and larger offshore financial institutions – have certainly caught wind of Capitec’s success in banking SA’s previously unbankables. We’d guess anyone willing to pay a premium on an already demanding rating will have Jannie Mouton’s ear…
Marc Hasenfuss
Thabo Mbeki’s term
Power-hungry
The Blunder
Former President Thabo Mbeki’s decision to stand for a third term a year after saying he had no intention of seeking constitutional change to do so. His opponent for leadership of the ANC was Jacob Zuma, who after an acrimonious campaign emerged victorious at Polokwane. Zuma’s support was predominantly from the left-leaning elements of the ANC alliance, but the leadership contest centred on personality, not policy. Zuma was able to use his new power to have criminal charges against him dropped, leaving questions about his credibility in office unchallenged in the courts.
The result
A compromised President and mixed messages to investors amid a devastating global financial crisis. The way the charges against Zuma were dropped – plus the subsequent bid to scrap the Scorpions, the crime-fighting unit that had charged Zuma – affirmed SA’s image as a corrupt society and raised critical questions about its democratic institutions. That’s left Zuma unable to lead decisively, especially when it comes to taking a stand against his former supporters/backers or taking tough policy choices critical for investment, job creation and improving services delivery.
The solution
ANC documents prepared for its 2010 national general council meeting show the party plans to review the way it elects leaders. It wants to prevent “opportunism, exploitation and corruption” that underpins party activities. It also has to ensure statements about zero tolerance for incompetence, corruption or abuse of power are applied equally and consistently. While Idasa has also called on the ANC to pass legislation making the funding of political parties transparent, Parliament also needs to be able to use its teeth properly and without sanction.
TROYE LUND
Uranium One
Dominion disaster
The Blunder
Back around 2004 – when gold’s prospects were looking fairly bleak – Afrikander Lease CEO Neal Froneman decided the way forward for his struggling junior mining company was through diversification into uranium by developing the Dominion prospect it controlled near Klerksdorp. The business was renamed Uranium One [JSE:UUU] but it all ended in tears when Dominion was shut down in October 2008, forcing Uranium One to take a US$1,8bn write-down. At the same time, Uranium One also took another $900m in impairment charges against various operations in the United States and Australia.
The result
Dominion failed due to serious problems with its underground mining operations, which didn’t deliver the required grade and production volumes. In turn, that played havoc with the high-pressure leach metallurgical plant built to treat the ore, because it never achieved the anticipated recovery rates.
Froneman jumped ship in February 2008, saying it was time for a career change, and set about developing what’s become ASX and JSE-listed Gold One International. Dominion was bought for $37m in 2010 by Shiva Uranium, which is controlled ultimately by the Gupta family.
The solution
Despite having developed SA’s most costly mining “dog”, Uranium One has survived thanks to one of its early M&A deals through which it made some acquisitions in Kazakhstan – one of the world’s major uranium producing nations. Uranium One is now controlled and managed by Russian state uranium company ARMZ, which holds 51% of the company. ARMZ’s intentions are to use Uranium One to expand its operations outside Kazakhstan, with particular attention being paid to Africa – where it’s just taken over the Mkuju River project in Tanzania. It remains to be seen what the Guptas will eventually make out of Dominion.
BRENDAN RYAN
Capitec Lament
PSG unbundling
The Blunder
While some companies in this cover story may bristle at our “blunderful” opinions, PSG’s unbundling of its stake in Capitec Bank in 2003 was a self-confessed mistake. No less a personage than PSG chairman Jannie Mouton admitted that in a recent annual report. Perhaps PSG was a tad concerned at Capitec’s risk profile (and capital requirements) at that early stage of the bank’s development. Although it’s made clear the decision to unbundle the bank should be seen in the context of PSG then being a potential hostile takeover target (purportedly Absa, which did get PSG Investment Bank).
The result
No sooner had PSG set free its holdings in Capitec than it became apparent – especially to the bigger punters on the market – that this little bank had latched on to a very workable (and very profitable) low-cost banking model for the masses. More importantly, Capitec wasn’t going to lack for funding as regards its ambitious development/expansion plans.
The solution
Full credit to PSG for swallowing its pride and going about the arduous task of re-building a holding in Capitec – a development helped by the dismantling of PSG empowerment partner Arch Equity (which fortunately had retained a significant minority stake in Capitec). The truth is, PSG did initially own 58% in this successful banking venture compared to the 34,9% it now owns. But the re-bundling exercise has proved very profitable, with Capitec’s share price catching fire over the past two years. Finweek doubts PSG – despite the strong run in Capitec’s shares of late – will be in any way inclined to entertain thoughts about unbundling or selling out. Then again, the big banks – and larger offshore financial institutions – have certainly caught wind of Capitec’s success in banking SA’s previously unbankables. We’d guess anyone willing to pay a premium on an already demanding rating will have Jannie Mouton’s ear…
Marc Hasenfuss
Thabo Mbeki’s term
Power-hungry
The Blunder
Former President Thabo Mbeki’s decision to stand for a third term a year after saying he had no intention of seeking constitutional change to do so. His opponent for leadership of the ANC was Jacob Zuma, who after an acrimonious campaign emerged victorious at Polokwane. Zuma’s support was predominantly from the left-leaning elements of the ANC alliance, but the leadership contest centred on personality, not policy. Zuma was able to use his new power to have criminal charges against him dropped, leaving questions about his credibility in office unchallenged in the courts.
The result
A compromised President and mixed messages to investors amid a devastating global financial crisis. The way the charges against Zuma were dropped – plus the subsequent bid to scrap the Scorpions, the crime-fighting unit that had charged Zuma – affirmed SA’s image as a corrupt society and raised critical questions about its democratic institutions. That’s left Zuma unable to lead decisively, especially when it comes to taking a stand against his former supporters/backers or taking tough policy choices critical for investment, job creation and improving services delivery.
The solution
ANC documents prepared for its 2010 national general council meeting show the party plans to review the way it elects leaders. It wants to prevent “opportunism, exploitation and corruption” that underpins party activities. It also has to ensure statements about zero tolerance for incompetence, corruption or abuse of power are applied equally and consistently. While Idasa has also called on the ANC to pass legislation making the funding of political parties transparent, Parliament also needs to be able to use its teeth properly and without sanction.
TROYE LUND
Uranium One
Dominion disaster
The Blunder
Back around 2004 – when gold’s prospects were looking fairly bleak – Afrikander Lease CEO Neal Froneman decided the way forward for his struggling junior mining company was through diversification into uranium by developing the Dominion prospect it controlled near Klerksdorp. The business was renamed Uranium One but it all ended in tears when Dominion was shut down in October 2008, forcing Uranium One to take a US$1,8bn write-down. At the same time, Uranium One also took another $900m in impairment charges against various operations in the United States and Australia.
The result
Dominion failed due to serious problems with its underground mining operations, which didn’t deliver the required grade and production volumes. In turn, that played havoc with the high-pressure leach metallurgical plant built to treat the ore, because it never achieved the anticipated recovery rates.
Froneman jumped ship in February 2008, saying it was time for a career change, and set about developing what’s become ASX and JSE-listed Gold One International [JSE:GDO]. Dominion was bought for $37m in 2010 by Shiva Uranium, which is controlled ultimately by the Gupta family.
The solution
Despite having developed SA’s most costly mining “dog”, Uranium One has survived thanks to one of its early M&A deals through which it made some acquisitions in Kazakhstan – one of the world’s major uranium producing nations. Uranium One is now controlled and managed by Russian state uranium company ARMZ, which holds 51% of the company. ARMZ’s intentions are to use Uranium One to expand its operations outside Kazakhstan, with particular attention being paid to Africa – where it’s just taken over the Mkuju River project in Tanzania. It remains to be seen what the Guptas will eventually make out of Dominion.
BRENDAN RYAN
International BLUNDERS
Ah yes, I remember it well…
Trinkets to jalopies. The costliest mistakes ever?
Forbes Magazine recently highlighted its 10 biggest business blunders of all time, in terms of not only lost fortunes and wealth destroyed but also the opportunity cost of the mistakes – covering everything from property to technology. Broad themes included shocking ethics and short-term thinking as being core to some of the worst business decisions ever. Among the blunders listed were: The 1626 decision by the Canarsee Indians to trade modern-day Manhattan for trinkets, followed years later by the Dutch trading then New Amsterdam in exchange for Suriname with the British. Ford Motor Company has had its fair share of trials and tribulations: it created the Edsel, named after founder Henry Ford’s son, in the Fifties, which proved to be one of the biggest errors of judgment in automotive history. Ford burned US$350m – in 1950 dollars – on the Edsel, which lacked unique design, price point or any other redeeming features.
Toyota’s vehicle recalls at the time the financial crisis was gaining traction and the company’s response to it did little to gain trust from its global customer base. BP’s handling of its Gulf of Mexico pollution crisis also failed to find favour with a market worldwide already cynical about the increased risk associated with exploiting dwindling natural resources.
While few blunders prove fatal for companies, most cost shareholders money and can be deeply embarrassing to the individuals involved. Among the more spectacular marketing blunders of our times is the 1993 offer by vacuum cleaner maker Hoover, which offered customers who spent £100 on any of its products free flights between Europe and the United States. It proved so popular the company reneged on its offer: the entire board was sacked and Hoover sold to an Italian group – costing corporate reputation and around £50m.
Another marketing bungle highlighted the risks of using the Internet to distribute promotional material: email was in its relative infancy when Starbucks offered an email coupon for a free iced coffee to friends and family members. It went viral and the company learned to its cost the vouchers could also be printed off an infinite number of times. When Starbucks pulled its offer, disgruntled customer Kelly Coakley led a $114m class action lawsuit.
Some blunders are downright dangerous to the customers of that particular company. Defects in batteries made by Dell for Sony laptops caused several of the devices to randomly combust – leading to the biggest recall of computers ever. Dell replaced 4m laptop batteries, while between them Apple and Lenovo exchanged more than 2m more.
The Enron collapse epitomised much of what had gone wrong with corporate America and should have rung an early warning bell of what was to come in 2008, when the global financial system was brought to its knees by the same sort of financial chicanery and dishonesty that led to the collapse of what was once one of the more admired companies worldwide.
Worse could be yet to come, Forbes cautions. The global financial crisis was sparked by the unravelling of the US housing market and the near worthless securities written on the back of sub-prime mortgages. It remains to be seen whether or not the treatment will cure or kill the patient.
“The biggest blunderers of all time could well be the world’s central bankers. Guys like US Federal Reserve Chairman Ben Bernanke have the power to jump-start or derail entire economies by cranking the credit spigot open or closed… with any luck, Bernanke and company won’t earn a spot on this list.” Bruce Whitfield
The big difference between corporate blunders and those made in the political sphere or public service is that the consequences of the former are measured almost immediately and remedial action usually taken more quickly and effectively than the latter. Companies that fail to deal with life-threatening blunders are removed from the system, which can be painful, but the market has proven to be a considerably more efficient mechanism at wiping out idiocy than politics ever has.
Mistakes happen all the time: strategic miscalculations and errors of mistimed exuberance or conservatism can be equally damaging. Hindsight is the perfect science. However, we believe those in positions of authority are paid to know better and they – like the victims of their decisions – should live with the consequences of their actions.
Not included in our list – for reasons of space but no less wanting in terms of their blunder status – include:
* Bloated government and a rapidly expanding, increasingly inefficient public service – costing taxpayers twice what it did five years ago.
* Increased wealth taxes in an environment where there’s little growth to drive sustainable jobs.
* A lack of policy certainty: no sooner does Government make firm policy commitments than a member of the “alliance” sows confusion.
* The failure to create an enabling environment to drive growth that will create jobs and drive taxes.
* Cipro and its inability to manage the companies register.
* The Estate Agency Affairs Board: fraught with infighting and a failure to administer SA’s property brokers.
* The small banks crisis and the failure to effectively broaden access to financial services while allowing the continued dominance of the “Big Four” to run this country’s banking system with apparent impunity.
* Coega: the development that was to bring a breath of economic fresh air to the windy city is at risk of turning into a considerable white elephant.
* Corruption: it seems pervasive and runs seemingly unchecked in the public sector.
* SA’s failure to fully capitalise on the magnificence of our hosting of the 2010 Soccer World Cup.
Finweek ’s ace team of investment writers has identified some of the 21st Century’s biggest blunders from an economic, corporate and political perspective, the consequences of which will haunt citizens, shareholders and executives for the next decade at least. It would be wrong to simply place the woes of the business community on the shoulders of Government. Several large corporations have been perfectly capable of blundering to disaster on their own. Though we don’t mean to pick on the public sector, such is the nature of 21st Century SA that public sector blunders have a direct and often negative consequence on the private sector.
Bruce Whitfield
Power implosion
Princes of darkness
The Blunder
Top of the list: uncertain power supply. President Thabo Mbeki admitted in December 2007 Government made the wrong decision in denying Eskom’s late Nineties requests for Budget to build new power stations. Tony Twine, of Econometrix, says: “The engineering boffins at Eskom had created very clear scenarios 10 years in advance of the problems experienced in 2008 but were deliberately ignored by the Departments of Energy, Public Enterprises and the National Energy Regulator, all of whom were more interested in handing out electricity like political candy than ensuring the candy-making machine could keep up with demand into the future.”
The result
January 2008 saw load-shedding and a warning that Eskom couldn’t guarantee power supply to 138 of its biggest industrial customers. The mining sector – which accounts for one-third of SA’s foreign exchange earnings – was hit hardest. Smelters and mines were either shut or cut back on their operations. Global commodity prices rocketed – and SA is missing the boom. Three years after the crisis Eskom says it’s on track with a R385bn build programme. Business Leadership South Africa warns the Medupi and Kusile power stations won’t be enough, a warning echoed by Planning Minister Trevor Manuel. Eskom says its system is under pressure to 2012 before the first 790MW from the new Medupi coal-fired station come online in April next year.
The solution
You pay more for power. Government has to be bold in crafting, implementing and budgeting for energy plans that will not only meet future demand but also secure the most appropriate, cost-efficient energy mix for the decades to come. While Government argues coal has to be part of that mix because the abundant resource is available underneath SA’s soil, it’s also sticking to its plans to expand nuclear energy generating. Independent power producers (IPPs) are also going to have to be given the right space to enter into and compete in the power generation market.
TROYE LUND
Local government
Municipalities
The Blunder
Government’s failure to intervene successfully when municipalities first began grabbing headlines with political power struggles, crumbling service delivery, financial distress and mismanagement. Idasa’s Judith February says that failure to address increasing malfunction at local government level is probably national Government’s biggest blunder over the past 10 years, because it has the most serious consequences in the immediate term.
The result
Apart from increasing protests about municipal services delivery, local government has become what political analyst Dale McKinley refers to as the “soft underbelly of patronage and corruption” in SA. Government’s latest (2009) report on the state of local government admits it’s underpinned by widespread institutional and delivery paralysis, factionalism, a culture of patronage, fraud and nepotism and financial mismanagement, as well as ineffective and unaccountable politicians and officials. As a result, McKinley says local government can be best described as one of “recurring crisis management with successive rescue packages, grandiose development plans and parachuting promises”.
The solution
Local government elections are happening now. In 2009 President Jacob Zuma acknowledged change wasn’t happening at local government level as rapidly and effectively as citizens expected. Consequently, another municipal turnaround strategy was launched and last year Co-operative Government & Traditional Affairs Minister Sicelo Shiceka signed a delivery agreement with Zuma to implement that agreement, which is about “achieving a responsive, accountable, effective and efficient local government system” by 2014. Municipalities face the twin challenges of extending services to the poor and maintaining quality standards elsewhere.
TROYE LUND
Labour
Inflexible laws
The Blunder
It discourages sustained hiring. While the promise of sustained and “decent” work is being rolled out by the ANC Government ahead of upcoming local elections, the lop-sided nature of SA’s labour force is becoming more apparent. With real unemployment sitting at around 40% and young people (18 to 25) unemployment somewhere between 70% and 80% there are structural problems that need to be addressed. Punishing job creators isn’t the way to go about it.
The result
In the recent Adcorp labour survey, CEO Richard Pike noted that since 2000 SA’s temporary or part-time workforce had grown by 11,9%/year. That’s compared to an average decline of 1,5%/year in SA’s permanent or full-time workforce. Coupled with the global financial crisis – which wiped out 1m jobs in SA – and the cost of doing business rising rapidly due to new business “taxes” (such as the toll road system) the picture looks bleak. Even with the proposed plan to create 5m jobs over the next 10 years that will still leave SA sitting with an unacceptably high unemployment rate as employees work longer due to limited social and financial security coupled with a high “real” tax rate.
The solution
Keeping organised labour happy has long been a “must” for the ruling party, but at some point bold steps need to be taken to stimulate job creation rather than job protection. Industry experts have pointed out technology means jobs are a commodity that can be exported worldwide to the most “business friendly” destinations and that’s an easy step: “Make political rhetoric pro-business”.
Pike has previously pointed out just how much new legislation has been introduced into the business environment to protect labour but no single position or Government department has been tasked with reducing unemployment despite it being a key banter point for politicians chasing votes.
TROYE LUND
Monetary policy
Interest rates
The Blunder
Former Reserve Bank Governor Tito Mboweni, having cut interest rates by a total of 450 basis points in 2003, made the mistake of cutting further in 2004 and 2005. In August 2004, Mboweni lopped a further 50 basis points off the repo rate – and then repeated that in April 2005. On the way back up, he overdid things again. He hiked interest rates by 550 points between June 2006 and June 2008, bringing the prime overdraft rate to 15,5%. The last two hikes in 2008 were regarded as especially heinous, as consumer spending was already in recession, with food and fuel driving inflation.
The result
The cuts in 2004/2005 were a step too far for the Reserve Bank. The rate cuts fuelled an unprecedented consumer boom, with household consumption rising by a whopping 6,9% in real terms in 2005 and an even more eye-popping 8,3% the next year. There was a credit binge that proved very difficult to halt. Private sector credit extension rose by almost 26% in 2006 and – in a continuation of the lagged effects of low interest rates – by more than 21% in 2007. But then Mboweni rudely interrupted the boom with excessive interest rate hikes, pushing household consumption expenditure into recession from third quarter 2008 to mid-2009.
The solution
The remedy is for central bank governors to learn patience. Mboweni was overly gung-ho on the way down and overly gung-ho on the way up. In the process, consumers built up a debt overhang that still influences policy. Banks remain reluctant to grant credit. It now takes bigger declines in the repo rate to achieve the same result. Mboweni’s successor has cut the repo rate by 650 points. Mboweni couldn’t see he was creating a psychology of easy credit and later needed a sledgehammer to stop it: a little patience would have saved Mboweni from a lot of criticism.
GRETA STEYN
Telecommunications
Otherwise engaged
The Blunder
Instead of liberalising telecommunications in SA, the new ANC Government of 1994 adopted the same backward policies as its National Party predecessor. Telkom’s monopoly was retained and no other operators allowed to provide national networks. Putting its own financial interests ahead of those of its constituency, the State also hangs on to shares in Telkom, despite quasi-privatisation of the company, and drives policy that cements its monopoly instead of promoting competition in the market. Neotel wasn’t allowed to get off the ground until 2006.
The result
SA’s telecoms industry was held back more than a decade. Whereas deregulation and liberalisation should have started in 1994, the industry was essentially kept in the dark ages until 2008. New networks that sprang up in post-apartheid SA – even Vodacom and MTN – are reliant on Telkom for connecting them countrywide. The price of telecoms is kept exorbitantly high and competition prevented to protect Government’s revenues from Telkom. Not only are prices high but service is deplorable.
The solution
After 14 years of incompetence in Government’s management of its telecoms policy, the private sector stepped in. A subsidiary of the Altron Group – Allied Technologies [JSE:ALT] (Altech) – took the Communications Department to court. The court ruled in favour of Altech and opened up the market to network operators, allowing them to provision their own networks for the first time. ECNS licences were made available for the purpose and many operators sprang into action building their own networks and cancelling contracts with Telkom. The industry has lots of catching up to do, but finally some price reduction is coming to the market and international cable projects are initiated to better connect SA with the rest of the world.
SIMON DINGLE
Anglo American
Role in BEE
The Blunder
It was in 1996 when Anglo American [JSE:AGL] ’s then silvery, high-handed CEO Julian Ogilvie Thompson announced the winner of the race to buy 34,9% of JCI as part of a broader group restructuring. Former MK operative and Capital Alliance chairman Mzi Khumalo stepped from the shadows to announce his newly created African Mining Group (AMG) would take the helm of one of SA’s oldest mining houses. It was the first in a series of well-intentioned – but ultimately blundersome – black economic empowerment transactions, the effect of which was to create a new uber class of moneyed individuals: the black oligarchy, who also included Tokyo Sexwale and Patrice Motsepe but with little evidence of any trickle-down wealth.
The result
In order to keep its head above water, AMG needed 5% compound growth/year in the JCI share price, having paid 5450c/JCI share – equal to a then massive R2,9bn. That was already pressure. But it didn’t help: Khumalo was out of his depth – and his board knew it. JCI’s price slipped through 3000c/share. The market’s vote of no confidence in that empowerment deal – in which Anglo had preferred Khumalo over Cyril Ramaphosa’s Nail – was bloody and ruthless and catastrophic.
The solution
Khumalo drafted in Randgold & Exploration Company [JSE:RNG] commercial director Brett Kebble to take the helm at JCI. It was an attempt to sandbag a quickly deteriorating board. Khumalo preferred a coal/base metals group; Kebble was keenly interested in reviving SA’s gold heritage with a new gold major. The demise of the Kebble and Khumalo union was obvious as it was painful to behold. JCI was in ruins and Anglo left wondering how it was going to recoup its R2,9bn. Within months, Kebble resurfaced – as he was often to do – with “JCI Gold”. His plans were to consolidate SA’s gold industry and create a new giant. By 1999, the gold price had halved to $252/oz. The rest is history.
DAVID MCKAY
Old Mutual
Globalisation
The Blunder
When Old Mutual [JSE:OML] listed on the JSE at the end of the Nineties it heralded a new era for a stuffy assurance firm that could use its newly won corporate status to expand its influence, first, into the tempting United States market via a London listing that conveniently gave its senior directors a bolthole and source of foreign income before taking on the world. History shows that through a process of shocking timing, overpaying and mismanagement the group ran up corporate costs of more than R100bn.
The result
Old Mutual’s foray sparked other misadventures, particularly to the US, where some of its smaller competitors figured they’d be more nimble. It cost Sage its corporate life and one of SA’s oldest and most respected brands was consigned to the dustbin of corporate failure due to its ill-conceived US adventure. Discovery had the good sense to pull the plug on its Destiny business after pouring more than R1bn into it and continues to chip away at offshore markets – particularly in Britain and more recently in Asia.
The solution
It’s taken a decade for the company under a new board and (mostly) new management team to acknowledge the folly of its earlier strategy. Under CEO Julian Roberts – a former financial director, later head of the group’s mid-noughties acquisition of Skandia of Sweden, to look to consolidate and simplify its massively complex and inefficient group structure. Old Mutual has finally offloaded its US Life operation, part of which once belonged to Sage, and is currently conducting a partial listing of asset manager OMIGSA, while trying to offload Nedbank as part of an ongoing debt-reduction strategy.
BRUCE WHITFIELD
Anglo American
Fiasco Down Under
The Blunder
Anglo had long wanted to increase its exposure to iron ore in Western Australia (WA) but was stymied twice by arch rival Rio Tinto, with the first incident happening in 2000 when Rio Tinto outbid it for control of Australian iron ore junior, North. Anglo tried again when it took over Kumba Resources in 2005, which was in a 50:50 joint venture involving the Hope Downs iron ore project with local company Hancock Prospecting, run by Australia’s richest woman – Gina Rinehart.
Rinehart subsequently pulled the rug from under Anglo American [JSE:AGL] – citing a legal loophole over change of control at Kumba – and teamed up with Rio Tinto instead. Aussie insiders subsequently reckoned the real reason was then Anglo CEO Tony Trahar had rubbed her up the wrong way while Rio’s head of iron ore – the genial and easy going Sam Walsh – followed just the right approach in dealing with the notoriously difficult Rinehart.
The result
Anglo’s expansion into iron ore outside SA was badly delayed, restricting the group to developing its Sishen mine, where growth was subject to rail and port constraints beyond Anglo’s control because those are State-owned. Rio, which owns its own port and rail infrastructure in WA, produced its first iron ore in 2008 from the 22mt/year mine it built at Hope Downs, which it is currently expanding by another 15mt/year.
The solution
Trahar was replaced as CEO by Cynthia Carroll in 2007 and she took a far more aggressive approach, buying control of the Minas Rio iron ore project in Brazil for US$7bn, on top of which Anglo has to invest – at last count – around $5bn to develop the project, which is due to start delivering ore at end-2013. Minas Rio should have very low operating costs. But Rio’s capital costs at Hope Downs have been orders of magnitude lower, with the original mine costing $1bn and the expansion another $1,6bn.
BRENDAN RYAN
The exchange rate
Rand wreckage
The Blunder
Somewhere around 1997/998 a number of leading South Africans worked very hard at making a bid for the 2002 Olympic Games to come to Cape Town. It became known later that the bid committee had used an exchange rate of US$1/R20 to calculate the cost of the games. The actual exchange rate at the time was around US$1/R6-R7. In 2001 the rand weakened sharply and, unlike his predecessor, the new Governor of the Reserve Bank refused to intervene. By December that year the rand was trading at as much as US$1/R13. That was oil on the flames and early in 2002 many a financial manager fancied himself a foreign exchange expert and tried to protect his business against the expected US$1/R20.
The result
At Naspers [JSE:NPN] the experts followed the policy of buying all their liabilities forward in strong currencies for two years. At the same time the expected returns were sold forward in weak currencies for two years. That simple policy had worked well previously, but after 2002/2003 the strong currencies suddenly weakened, while weak currencies, such as the rand, strengthened. At SA Airways, things went even worse – but this time the loss was for the pocket of the poor SA taxpayer. SAA’s former head sold all the airline’s old aircraft on lease and showed a huge profit. That left him with a R300m bonus and he left the country.
The solution
Companies should manage their businesses, not the currency – which is volatile and unpredictable. SAA, like other public corporations, should be privatised and forced to compete for goods and services in the open market rather than have the State as a permanent backstop – regardless of the actions of its management. When she ran Transnet (which “owned” SAA at the time), Maria Ramos said SAA’s management wasted around 50% of its time trying to guess what the future exchange rate would be – and it wasn’t even necessary. By freeing management to run the business of an airline it would force it to manage on the basis of operational risks and strategic imperatives rather than force it to behave like a Government department, with all the ancillary issues that brings.
VIC DE KLERK and BRUCE WHITFIELD
CapitecLment
PSG unbundling
The Blunder
While some companies in this cover story may bristle at our “blunderful” opinions, PSG’s unbundling of its stake in Capitec Bank Holdings [JSE:CPI] in 2003 was a self-confessed mistake. No less a personage than PSG chairman Jannie Mouton admitted that in a recent annual report. Perhaps PSG was a tad concerned at Capitec’s risk profile (and capital requirements) at that early stage of the bank’s development. Although it’s made clear the decision to unbundle the bank should be seen in the context of PSG then being a potential hostile takeover target (purportedly Absa, which did get PSG Investment Bank).
The result
No sooner had PSG Group [JSE:PSG] set free its holdings in Capitec than it became apparent – especially to the bigger punters on the market – that this little bank had latched on to a very workable (and very profitable) low-cost banking model for the masses. More importantly, Capitec wasn’t going to lack for funding as regards its ambitious development/expansion plans.
The solution
Full credit to PSG Group [JSE:PSG] for swallowing its pride and going about the arduous task of re-building a holding in Capitec – a development helped by the dismantling of PSG empowerment partner Arch Equity (which fortunately had retained a significant minority stake in Capitec). The truth is, PSG did initially own 58% in this successful banking venture compared to the 34,9% it now owns. But the re-bundling exercise has proved very profitable, with Capitec’s share price catching fire over the past two years. Finweek doubts PSG – despite the strong run in Capitec’s shares of late – will be in any way inclined to entertain thoughts about unbundling or selling out. Then again, the big banks – and larger offshore financial institutions – have certainly caught wind of Capitec’s success in banking SA’s previously unbankables. We’d guess anyone willing to pay a premium on an already demanding rating will have Jannie Mouton’s ear…
Marc Hasenfuss
Thabo Mbeki’s term
Power-hungry
The Blunder
Former President Thabo Mbeki’s decision to stand for a third term a year after saying he had no intention of seeking constitutional change to do so. His opponent for leadership of the ANC was Jacob Zuma, who after an acrimonious campaign emerged victorious at Polokwane. Zuma’s support was predominantly from the left-leaning elements of the ANC alliance, but the leadership contest centred on personality, not policy. Zuma was able to use his new power to have criminal charges against him dropped, leaving questions about his credibility in office unchallenged in the courts.
The result
A compromised President and mixed messages to investors amid a devastating global financial crisis. The way the charges against Zuma were dropped – plus the subsequent bid to scrap the Scorpions, the crime-fighting unit that had charged Zuma – affirmed SA’s image as a corrupt society and raised critical questions about its democratic institutions. That’s left Zuma unable to lead decisively, especially when it comes to taking a stand against his former supporters/backers or taking tough policy choices critical for investment, job creation and improving services delivery.
The solution
ANC documents prepared for its 2010 national general council meeting show the party plans to review the way it elects leaders. It wants to prevent “opportunism, exploitation and corruption” that underpins party activities. It also has to ensure statements about zero tolerance for incompetence, corruption or abuse of power are applied equally and consistently. While Idasa has also called on the ANC to pass legislation making the funding of political parties transparent, Parliament also needs to be able to use its teeth properly and without sanction.
TROYE LUND
Uranium One
Dominion disaster
The Blunder
Back around 2004 – when gold’s prospects were looking fairly bleak – Afrikander Lease CEO Neal Froneman decided the way forward for his struggling junior mining company was through diversification into uranium by developing the Dominion prospect it controlled near Klerksdorp. The business was renamed Uranium One [JSE:UUU] but it all ended in tears when Dominion was shut down in October 2008, forcing Uranium One to take a US$1,8bn write-down. At the same time, Uranium One also took another $900m in impairment charges against various operations in the United States and Australia.
The result
Dominion failed due to serious problems with its underground mining operations, which didn’t deliver the required grade and production volumes. In turn, that played havoc with the high-pressure leach metallurgical plant built to treat the ore, because it never achieved the anticipated recovery rates.
Froneman jumped ship in February 2008, saying it was time for a career change, and set about developing what’s become ASX and JSE-listed Gold One International. Dominion was bought for $37m in 2010 by Shiva Uranium, which is controlled ultimately by the Gupta family.
The solution
Despite having developed SA’s most costly mining “dog”, Uranium One has survived thanks to one of its early M&A deals through which it made some acquisitions in Kazakhstan – one of the world’s major uranium producing nations. Uranium One is now controlled and managed by Russian state uranium company ARMZ, which holds 51% of the company. ARMZ’s intentions are to use Uranium One to expand its operations outside Kazakhstan, with particular attention being paid to Africa – where it’s just taken over the Mkuju River project in Tanzania. It remains to be seen what the Guptas will eventually make out of Dominion.
BRENDAN RYAN
Capitec Lament
PSG unbundling
The Blunder
While some companies in this cover story may bristle at our “blunderful” opinions, PSG’s unbundling of its stake in Capitec Bank in 2003 was a self-confessed mistake. No less a personage than PSG chairman Jannie Mouton admitted that in a recent annual report. Perhaps PSG was a tad concerned at Capitec’s risk profile (and capital requirements) at that early stage of the bank’s development. Although it’s made clear the decision to unbundle the bank should be seen in the context of PSG then being a potential hostile takeover target (purportedly Absa, which did get PSG Investment Bank).
The result
No sooner had PSG set free its holdings in Capitec than it became apparent – especially to the bigger punters on the market – that this little bank had latched on to a very workable (and very profitable) low-cost banking model for the masses. More importantly, Capitec wasn’t going to lack for funding as regards its ambitious development/expansion plans.
The solution
Full credit to PSG for swallowing its pride and going about the arduous task of re-building a holding in Capitec – a development helped by the dismantling of PSG empowerment partner Arch Equity (which fortunately had retained a significant minority stake in Capitec). The truth is, PSG did initially own 58% in this successful banking venture compared to the 34,9% it now owns. But the re-bundling exercise has proved very profitable, with Capitec’s share price catching fire over the past two years. Finweek doubts PSG – despite the strong run in Capitec’s shares of late – will be in any way inclined to entertain thoughts about unbundling or selling out. Then again, the big banks – and larger offshore financial institutions – have certainly caught wind of Capitec’s success in banking SA’s previously unbankables. We’d guess anyone willing to pay a premium on an already demanding rating will have Jannie Mouton’s ear…
Marc Hasenfuss
Thabo Mbeki’s term
Power-hungry
The Blunder
Former President Thabo Mbeki’s decision to stand for a third term a year after saying he had no intention of seeking constitutional change to do so. His opponent for leadership of the ANC was Jacob Zuma, who after an acrimonious campaign emerged victorious at Polokwane. Zuma’s support was predominantly from the left-leaning elements of the ANC alliance, but the leadership contest centred on personality, not policy. Zuma was able to use his new power to have criminal charges against him dropped, leaving questions about his credibility in office unchallenged in the courts.
The result
A compromised President and mixed messages to investors amid a devastating global financial crisis. The way the charges against Zuma were dropped – plus the subsequent bid to scrap the Scorpions, the crime-fighting unit that had charged Zuma – affirmed SA’s image as a corrupt society and raised critical questions about its democratic institutions. That’s left Zuma unable to lead decisively, especially when it comes to taking a stand against his former supporters/backers or taking tough policy choices critical for investment, job creation and improving services delivery.
The solution
ANC documents prepared for its 2010 national general council meeting show the party plans to review the way it elects leaders. It wants to prevent “opportunism, exploitation and corruption” that underpins party activities. It also has to ensure statements about zero tolerance for incompetence, corruption or abuse of power are applied equally and consistently. While Idasa has also called on the ANC to pass legislation making the funding of political parties transparent, Parliament also needs to be able to use its teeth properly and without sanction.
TROYE LUND
Uranium One
Dominion disaster
The Blunder
Back around 2004 – when gold’s prospects were looking fairly bleak – Afrikander Lease CEO Neal Froneman decided the way forward for his struggling junior mining company was through diversification into uranium by developing the Dominion prospect it controlled near Klerksdorp. The business was renamed Uranium One but it all ended in tears when Dominion was shut down in October 2008, forcing Uranium One to take a US$1,8bn write-down. At the same time, Uranium One also took another $900m in impairment charges against various operations in the United States and Australia.
The result
Dominion failed due to serious problems with its underground mining operations, which didn’t deliver the required grade and production volumes. In turn, that played havoc with the high-pressure leach metallurgical plant built to treat the ore, because it never achieved the anticipated recovery rates.
Froneman jumped ship in February 2008, saying it was time for a career change, and set about developing what’s become ASX and JSE-listed Gold One International [JSE:GDO]. Dominion was bought for $37m in 2010 by Shiva Uranium, which is controlled ultimately by the Gupta family.
The solution
Despite having developed SA’s most costly mining “dog”, Uranium One has survived thanks to one of its early M&A deals through which it made some acquisitions in Kazakhstan – one of the world’s major uranium producing nations. Uranium One is now controlled and managed by Russian state uranium company ARMZ, which holds 51% of the company. ARMZ’s intentions are to use Uranium One to expand its operations outside Kazakhstan, with particular attention being paid to Africa – where it’s just taken over the Mkuju River project in Tanzania. It remains to be seen what the Guptas will eventually make out of Dominion.
BRENDAN RYAN
International BLUNDERS
Ah yes, I remember it well…
Trinkets to jalopies. The costliest mistakes ever?
Forbes Magazine recently highlighted its 10 biggest business blunders of all time, in terms of not only lost fortunes and wealth destroyed but also the opportunity cost of the mistakes – covering everything from property to technology. Broad themes included shocking ethics and short-term thinking as being core to some of the worst business decisions ever. Among the blunders listed were: The 1626 decision by the Canarsee Indians to trade modern-day Manhattan for trinkets, followed years later by the Dutch trading then New Amsterdam in exchange for Suriname with the British. Ford Motor Company has had its fair share of trials and tribulations: it created the Edsel, named after founder Henry Ford’s son, in the Fifties, which proved to be one of the biggest errors of judgment in automotive history. Ford burned US$350m – in 1950 dollars – on the Edsel, which lacked unique design, price point or any other redeeming features.
Toyota’s vehicle recalls at the time the financial crisis was gaining traction and the company’s response to it did little to gain trust from its global customer base. BP’s handling of its Gulf of Mexico pollution crisis also failed to find favour with a market worldwide already cynical about the increased risk associated with exploiting dwindling natural resources.
While few blunders prove fatal for companies, most cost shareholders money and can be deeply embarrassing to the individuals involved. Among the more spectacular marketing blunders of our times is the 1993 offer by vacuum cleaner maker Hoover, which offered customers who spent £100 on any of its products free flights between Europe and the United States. It proved so popular the company reneged on its offer: the entire board was sacked and Hoover sold to an Italian group – costing corporate reputation and around £50m.
Another marketing bungle highlighted the risks of using the Internet to distribute promotional material: email was in its relative infancy when Starbucks offered an email coupon for a free iced coffee to friends and family members. It went viral and the company learned to its cost the vouchers could also be printed off an infinite number of times. When Starbucks pulled its offer, disgruntled customer Kelly Coakley led a $114m class action lawsuit.
Some blunders are downright dangerous to the customers of that particular company. Defects in batteries made by Dell for Sony laptops caused several of the devices to randomly combust – leading to the biggest recall of computers ever. Dell replaced 4m laptop batteries, while between them Apple and Lenovo exchanged more than 2m more.
The Enron collapse epitomised much of what had gone wrong with corporate America and should have rung an early warning bell of what was to come in 2008, when the global financial system was brought to its knees by the same sort of financial chicanery and dishonesty that led to the collapse of what was once one of the more admired companies worldwide.
Worse could be yet to come, Forbes cautions. The global financial crisis was sparked by the unravelling of the US housing market and the near worthless securities written on the back of sub-prime mortgages. It remains to be seen whether or not the treatment will cure or kill the patient.
“The biggest blunderers of all time could well be the world’s central bankers. Guys like US Federal Reserve Chairman Ben Bernanke have the power to jump-start or derail entire economies by cranking the credit spigot open or closed… with any luck, Bernanke and company won’t earn a spot on this list.” Bruce Whitfield
