Urgent action needed to save SA, says PSG’s Piet Mouton
Urgent action — even prescribed assets — necessary to save SA
● Piet Mouton, CEO of Stellenbosch-based investment group PSG, says the government has been far too slow to open up the economy, and the damage could be “irreparable”.
“I don’t know how SA comes out of it. I think this lockdown has hurt our country significantly. I understand the initial rationale but the extended lockdown, given SA’s economic position, I do not understand.”
The “reality” is that the number of people critically ill or dying from the coronavirus is relatively low and the recovery rate is high.
“Even if we have a significant number of fatalities, there are 800,000 matrics that need to write this year.
“What happens to them if they don’t get to finish the year? Do we simply say, ‘you are lost forever’?”
He says the number of those killed by the virus must be set against the millions who are in terrible distress because they’ve lost their incomes or taken savage pay cuts as a result of the lockdown, and the millions more who will suffer the consequences of a collapsed economy.
SA’s only hope of recovery lies in the private sector being allowed to do what it does best as quickly as possible with the fewest regulatory constraints, he says.
“I just hope there’s a resilience in the private sector that they can get it going again.
That there are a sufficient number of entrepreneurs who can pull us through.
“Otherwise I don’t know how our country pays for this destruction.”
The government can help by cutting red tape, making it significantly easier to start businesses and giving micro-businesses tax breaks to get going, he says.
Direct government funding is not the answer. It removes the incentive to perform, somebody has to pay for it and there’s always the potential that the money will be misallocated.
“Removing all the red tape from the system is by far the easiest way of reinvigorating the economy,” says Mouton.
“The problem with government funding is there is no accountability and it goes to the wrong projects. Because who decides who gets the funding?”
PSG, which was started by Mouton’s father Jannie in 1995, has been particularly brilliant at this.
It is behind some of the most spectacular investment stories in SA, notably Capitec and private school group Curro.
“If your idea is good enough and you try hard enough, the likelihood is you will get funding,” says Mouton.
“That is how our model is built. Around early-stage investments.
“It’s always a slightly difficult marriage because we’ve got to believe in your story. You’ve got to be able to pitch to us.”
PSG’s model is to buy big stakes in very small unlisted businesses, which it then incubates, providing strategic advice and growth capital.
It has narrowed its focus to avoid taking on too much, he says, “but there are numerous other funding parties out there”.
Mouton says there’s an argument for using prescribed assets to fund SA’s recovery, as proposed in a recent ANC document, although not to support ailing state-owned enterprises.
“I’m totally against supporting these SOEs. They should privatise or partially privatise them so they don’t cost the country any money.
“But we do have a massive hole in our tax collections and that hole needs to be filled in some way. All these R500bn incentivised packages and grant payments — how can we fill the payment gap?”
Adding to the private sector’s already overwhelming tax burden would be counterproductive.
“We’re a significantly taxed country, so that would be severely negative to business
You either use pension money to fill the hole, or tax me at 70% and company tax goes to 50% and you kill the economy. And then the pension funds in any case lose the money
and people trying to keep this ship afloat.
“But you’ve got to fix the hole. And prescribed assets from pension funds is an interesting place to go and look for the money. Because I don’t know where else you can go.
“You either use pension money to fill the hole, or tax me at 70% and company tax goes to 50% and then you kill the economy. And then the pension funds would in any case lose the money.”
If the prescribed assets went to the right projects and there was full accountability, there’d be buy-in from the pension funds, Mouton believes.
“They’d be a big subscriber in many instances to government infrastructure projects because that is where they get some of their yield.”
But the projects would have to be done on a commercial basis by people with professional expertise.
He cites the example of green energy projects that are all essentially funded by the pension fund industry.
“They’re built and operated by big, independent power producers and essentially sold to the pension fund industry who use it as a yield product.”
But pumping money into infrastructure is only part of what is needed for an economic turnaround, he says.
“Red tape in business is a significant obstacle to getting this country going again. It takes too long to do stuff.”
A recent ANC economic strategy document calls for more centralised state control of the economy, which Mouton says would be a “disaster”.
The lockdown has been a catastrophe for the country, but Mouton says he believes it will create many attractive buying opportunities for PSG.
“There are many businesses out there that are going to be in a marginal position. We’ll be able to do deals over the next six to 18 months that would have cost us multiples of the price five months ago.”
He says they were “fortunate” that just before lockdown PepsiCo acquired Pioneer Foods from PSG agribusiness subsidiary Zeder, which brought “quite a bit of liquidity” [R1.7bn in dividends] within the group”.
It will add a further R4bn to its war chest by cutting its stake in Capitec from 32% to 4%. This will reduce its discount to net asset value and save it from having to comply with cumbersome banking regulations, which would prevent it from being a “nimble and dynamic” investment holding company able to respond quickly to opportunities, he says.
“We’ve decided we’re going to look at everything, explore different opportunities and give it a go.
“If we can’t find anything, at least we’re being proactive.”