Rajen Pillay – CEO Garuda Capital
Professor Rajen Pillay, CEO of Garuda Capital and Faculty Member of Economic and Financial Sciences at the University of Johannesburg, explains why Africa is the market of the future following the ratification of the African Continental Free Trade Agreement (AFCFTA).


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Rajen Pillay

CIARAN RYAN: My name is Ciaran Ryan and this is CFO Talks and today I am very happy to be talking to Professor Rajen Pillay who is the CEO of Garuda Capital, that’s a financial intermediary involved in corporate deal making and financing across the sub-continent. Rajen has been involved for more than 20 years in the investment banking space assisting clients with corporate and entrepreneurial finance. He is also a faculty member of economic and financial sciences at the University of Johannesburg and he is Director of the ANC Veterans League Investment Holdings and chairs its investment committee. So first of all, Professor Rajen Pillay, welcome to CFO Talks, how are you this morning?

RAJEN PILLAY: Very good, Ciaran, much appreciated


The African Continental Free Trade Agreement


CIARAN RYAN: Right so one area that you have been paying a lot of attention to in recent times is The African Continental Free Trade agreement, which was recently ratified and that will benefit 55 countries and about 1 billion people across the continent. Now that was launched by the African Union in 2018 and it’s a very interesting project because for a variety of reasons only about 16% of African trade is amongst Africans themselves, that compares with about 60% within the EU. In March 2018, 44 countries signed up with Nigeria and South Africa holding back. Now this agreement has moved closer to becoming an actuality and the expectation is that this will spur far greater inter African trade cutting levies by about 10% and boosting trade by about 50%. Can you just give us a little bit more background to this and how long before you expect we will see some benefit from this Free Trade Agreement?

RAJEN PILLAY: Ciaran I think it is a very interesting point and the question is certainly very interesting, I think what has been achieved so far is a broad political agreement. I think the political agreement has taken a long time to get to where we are, but nevertheless 55 countries have signed up. It’s looking like it’s becoming a reality, however there are a lot of issues on the ground that are inter country relationships that need to be sorted out and designed and straightened out first. So my view is that from a practical implementation point of view the African Free Trade Agreement is still rather a long way from implementation, still a long way away. If you look at South Africa for example, we are certainly a signatory to it but when I chaired the Forth Economic Conference last year, we invited the South African Revenue Services Commissioner Mr. Kieswetter, the SARS Commissioner to come and address us on this. The reply that we got back was that SARS is unable to give an opinion and they are unable to share a platform as they haven’t had the directives yet from Treasury in terms of how the customs unit is going to work, how the customs tariffs and barriers are going to come down and what would be the impact on South African revenue losses from customs earnings. So, to answer your question in short, I think it will still take a bit of time in terms of bilateral agreements between countries and then agreements between the block. So, the political stage is being address but the practical stage, the impact of reduction of levies, loss of revenue and free movement of goods, is still to be ratified and agreed across that entire 55 countries. My view is that we are actually coming to the detail portion now and that’s going to take rather long.

CIARAN RYAN: I mean I think if you look at the European Union hasn’t that taken about 30 years to get to the point where it is today and the world is certainly moving towards these regional trading blocks. Africa for some reason, well maybe its not that much of a surprise, has been left behind. Our trade routes for example because of the colonial history they extend from the inland to the ports and then to the former colonial countries so we’ve got this legacy of infrastructure which is not geared towards trade between the African countries themselves. Isn’t that correct?

RAJEN PILLAY: That’s absolutely true and correct and virtually every African country has the same kind of footprint, they trade with Europe, they trade with US but they don’t have intra African trade, so that’s very minimal. It’s a big step to be able to try and address and you are quite correct the European Union did take an awfully long time to get going having got the political agreement, very much like what is being done now, the practical implementation of the EU took 15-17 years. So these are complex discussions and I think we are just at the beginning of that particular journey.

CIARAN RYAN: What does this mean for the existing free trade agreements that we have like the SADC, the Southern African Development Community. You also have one in West Africa and you also have one in East Africa, what about these regional blocks?


CIARAN RYAN: Right, will they get subsumed into this greater free trade agreement?

RAJEN PILLAY: Well, that’s part of the complexity, because those regional trade agreements still exist and everybody operates according to that, the customs union SACU for example is based on that and that’s what’s legislated and that’s how revenue is shared between the SADC countries in terms of SACU. So, this is going to eclipse and overlap all of that, which means what’s existing has to be dismantled first and then it has to be replaced. So you can see what I’m saying that it’s not going to be conceivably happening overnight or in the short term. So we have to dismantle regional existing relationships and then subscribe the amendment countries have to subscribe for the new block relationships.

CIARAN RYAN: I would imagine there’s going to be some resistance to this because yeah, ultimately will it allow for free movement of people across borders and doesn’t that pose a problem for countries like South Africa already hosting a large number of undocumented migrants?

RAJEN PILLAY: Yes, it certainly does and whilst the political speak is very generous and very favorable in terms of tariff reductions and allowing free trade of goods, free movement of people like we see in the EU at the moment is still a long way away. I mean the two large industrial partners in Africa, on the content are Nigeria and South Africa and you find that people will be attracted towards those key hubs as we are seeing in South Africa and in Nigeria. So, I think the unilateral dropping of borders and free access of people, is really going to create a lot of issues in terms of pressure on infrastructure and control of movement etc. So, it’s still really going to be a difficult you know, a difficult matter to deal with.

CIARAN RYAN: One of the things that occurs to me when you look at this and it’s been a dream I’m sure of African countries for decades is the lack of infrastructure to get trade going. I mean, you just look at the border between South Africans and Zimbabwe particularly during this COVID crisis that we’ve got at the moment where trucks are backed up there sometimes for up to a week now, it should be possible to just glide through that border very simply, but you have so much entrenched interests in maybe keeping the system the way it is, you know, in a fairly dysfunctional and broken way. Do you think this is going to be part of the problem is how do we get the infrastructure fixed?

RAJEN PILLAY: It’s certainly going to be part of the problem and presents a major headache. If you move one container from Durban through to Zimbabwe or from Zimbabwe to Durban Harbor, for example, the one container requires like 22 documents to be attached to it and that’s to cross one border. So, if you wanting to get into Zambia or Angola etc, it becomes much more complex. Unfortunately these colonial interests have heavily entrenched and it’s going to take a lot of de entrenching to remove them.

CIARAN RYAN: Right, now as a result of COVID, there’s been talk of re industrializing the country and relying less on cheaper imports from China. Is this realistic? I’m sure not in the, in the short term, but is it realistic in the medium term?

RAJEN PILLAY: Well you know re industrializing is quite a big concept. You know, a lot of the African countries have been stripped of their industrial capacity and been stripped of their industrial power. Cheap imports have been the panacea for all kinds of consumer goods and requirements. The bottom line is that the African markets are small in comparison so you don’t have long production runs, you can’t get unit costs down as they do in China for example. Perhaps to be very you know, candid and open, I think the only thing that becomes that will allow for South Africa or for Southern Africa to re industrialize and in other words, to re industrialize implies becoming competitive. The only factor that would really allow that is currency depreciation. The currency depreciation will tend to hold back imports, making ports more expensive and make domestic production more comparatively priced competitive. So I think, as we’ve been seeing in the last 10 or 15 years, the only real buffer to cheap imports and the only real competitive edge we can probably get is if the currency continues to depreciate rather than any other you know macroeconomic solution that might be proposed. Our cost basis is just basically too high compared to China and to India and of course our markets are too small. The combined effect of that small markets, low volumes and higher production costs makes industrial production difficult.

CIARAN RYAN: I mean, if you look at the countries that are doing fairly well in Africa, when we think of Ethiopia, for example, where there’s been quite an industrial resurgence there over the last decade or so, South Africa is actually been very heavily de-industrialized. Is this a sustainable long-term approach to rely on currency depreciation?

RAJEN PILLAY: Well, it’s not something that’s willingly done. The currency depreciation has been essentially a blessing, an unknown blessing because in industrial production, invariably, one of the highest cost of production is that of labor. And you mentioned Ethiopia, I mean the GDB per capita, the cost of labor is significantly lower than in South Africa. So when you’re talking industrialization, unless of course, if it’s IT, which is a completely different skills base, the cost of labor does become significant and is a major cost of industrial outputs. So, unless the trade unions relax and unless we can get our base labor costs much lower by bringing in the masses of unemployed people but lowering the unit cost of labor the potential for industrialization is really not very strong.

CIARAN RYAN: I mean, this is quite an interesting time that we’re in right now because of COVID and there’s all this talk about the reemergence of national borders and nationalization, not nationalization, nationalism. You know, protective barriers being reimposed in order to protect local markets. At the same time here, we’re talking about a free trade area, which would be the, I think the largest in the world and, you know, covering pretty much the entirety of Africa are these two forces going to collide somewhere in the middle.

RAJEN PILLAY: Yes, most certainly. You know the African continental free trade area will be the largest trading block, it’ll be bigger than NAFTA, it’ll be bigger the EU in terms of the number of countries and certainly the space. But when we talk about protecting markets, you know that’s a difficult concept to try and agree with because we don’t really have any market to, to actually defend. When you say defend markets would imply that you already have any industrial capacity and if you look at textiles, for example, that has just been totally decimated and it’s gone. So, over the last 20 years what you said earlier Ciaran is quite right you know re industrializing from a position of weakness, that’s going to be a very, very big challenge. So I think more the ships should be towards typically high labor employment sectors, that being textiles and agriculture and tourism. But we talk about hardcore industrialization we not, you know, we don’t have any favoured status or any preferential position compared to China and India where costs are really low markets have big, run volumes are large, outputs are significantly higher than the Southern African consumption, for example and that’s the only way to get unit costs down. So, my feeling is that this thing of COVID where they want to reintroduce borders etc is certainly there but the same experience has been felt in Europe, it hasn’t really been effective.

CIARAN RYAN: I mean if you go back 20 years, we had our first democratic elections in 1994. At that time we used to have a fairly robust textile sector. We also used to make TV sets, radios you know, we had a, not a huge sector, but those have gone pretty much haven’t they? And I mean, if, you were to wind back the clock, what could we have done to save those sectors?

RAJEN PILLAY: Well, unfortunately and I’m certainly a victim of that when I was in the textile industry, Mr. Trevor Manual’s perception of unilaterally reducing tariffs and import barriers. While other countries where were actually flooding our markets was not good for our job creation, was not good for our industry and has been really very detrimental to be quite Frank. What the government did at a particular time was they chose, particular industries, the automotive industry in particular, which was really subsidized and that’s why our automotive industry can still be a supplier globally for automobiles, but other sectors have been compromised like textiles for example. So, it’s been a particular industrial policy, which South Africa has followed which I clearly can’t see having been a winning industrial policy.

CIARAN RYAN: Do you think we entered into this, that was called the general agreement on tariffs and trade at the time, which I think then became the world trade organization. Do you think at that time that we were a little bit bamboozled and blinded, we were, we were so mesmerized by the whole democratic experiment that we, we jumped into something pretty blindly without seeing where this would lead.

RAJEN PILLAY: Well I certainly completely agree with that and I’ll take it a step further. I think we were not just bamboozled I think we were co-opted and the people in positions of power at the time, in terms of trading industry and ministry of finance that rather than shake the boat, they wanted to show compliance and that compliance and adherence to, what I term Eurocentric policies and principles have really set the country back industrially and certainly economically.

CIARAN RYAN: Do they foresee that the world is, turning a little bit back from this whole idea of globalization and shifting all of our industrial capacity to China and trying to reestablish some protective barriers so that you have industries that can begin to grow and operate in, relative safety within your own borders. Is that the kind of future that we see over the next decade? Yeah.

RAJEN PILLAY: Yes, you know it certainly is. So that’s probably the only way to reestablish some kind of industrial base. If you look at South Africa you know we still have some semblance of a textile industry, for example. Whereas if you look at the UK, UK had a thriving, industrial textile sector in the fifties, sixties, and seventies, that totally wiped out, totally decimated and I think now the swing is away from China. But you know an important point needs to be discussed and that is that China itself is now becoming uncompetitive. So, a Chinese rural worker for example, got paid $5 now he wants to buy an apartment in the center of the town, to buy an apartment in the center of the town he needs to have wages of not $5, but he need to have wages of $15. So, that’s the natural progression of industrialization and commercialization, people want to live better. So property prices, unit labor costs in China have been increasing and it’s projected that in 10 years’ time, China will not have the industrial dominance that it currently has because they labor costs have also gone up and this is typically what happens with industrial centers of production, they tend to move. You might remember the time in the early sixties and seventies when Japan was a big producer of PCs and laptops, etc. then it moved to Thailand and then it moved to Vietnam, so centers of industrial production does move over time as and when your population becomes more ambitious and becomes more demanding in terms of a unit cost, wages and salaries etc. So, that’ll certainly be happening and the projection is that India would probably be on a global basis the lowest cost producer in the next 10 years when China allows the cost to run up.

CIARAN RYAN: Right, okay. Talk to us for a second about Garuda capital and also some of the things that you’re doing. Well, one of which has special purpose acquisition companies or SPACs, I think they are called. Just explain what these are, and I’m also quite interested to know, your particular interest in this African free trade agreement and your involvement, you are advising customers on trade issues and that sort of thing. Give us a bit of background on that.


About Garuda Capital and SPACs


RAJEN PILLAY: Yes, so Garuda Capital is a boutique M and A firm, we are financial intermediaries. Typically our main business is that of capital raising, so clients approach us for large projects, which they want funded and we either go to debt markets, or we go to equity investors, structure the transaction, raise the capital and get the project going. So that’s where we operate, our transactions our minimum well, our preferred transaction is about one hundred million Rand project and the largest we were engaged on was R9.1/R9.2 billion for acquisition of certain media assets on behalf of clients. So our expertise is in complex transactions, structuring corporate finance etc. We have a particular interest in a SPAC that is Special Purpose Acquisition Companies, well, it’s personal interest because I actually am the only person so far in South Africa to have undertaken a formal academic study of SPACs. A SPAC is a Special Purpose Acquisition Company and it’s a listed instrument on the Johannesburg stock exchange. So the interest comes in in that this is the newest instrument that’s been introduced on the JSE, the JSE since the 1920s or since the JSE was first started, allowed capital raising only via only one method. That’s what they call the traditional minimum listing requirements. So, if you wanted to raise capital on the Johannesburg Stock Exchange, you could only do it by listing the company and that was basically for assets, which are essentially mature assets. So you’d have a company like SASOL or South African breweries for example, they’d have a track record. You’d be able to look at the balance sheet, you’ll be able to look at the income statement, you’d be able to look at the management and you’ll be able to assess whether you want to put money into that particular company and raise capital etc for expansion, for South African breweries, or Sasol, etc. So, this new instrument called a SPAC is what we call a financial innovation and it’s completely different from the traditional minimum listing requirements as has been historic with the JSE and with all large major forces. So SPACs initially originated out of the US on NASDAQ by the New York Stock Exchange and it’s the big difference is that rather than having an established business with a long track record, that means audited track record for three or four years audited balance sheets etc. A SPAC is a completely new entity, basically a shell company with no assets in it, but what they do have would be a management team. with a good track record and that management team would be on the lookout for viable assets, for decent acquisitions, etc. What would happen is that investors would look at the team rather than looking at the business and the assets, because there are no assets and there is no business. They would look at the team and say, do we trust this team to be able to find good acquisitions for us and make good investments for us so that we can get a decent return on it. And the regulations around SPAC are designed around that to allow the flow of surplus funds in other words savings into a new company with a good idea and a good vision. Back that vision back the team and hopefully then the team would, make decent acquisitions, decent investments, and that will yield good returns to investors. So that’s essentially what a SPAC would be. In South Africa to give you an example on the JSE there’s more than 400 companies which have listed via the traditional route. That means, established assets, good track record audited balance sheets, etc. Whereas there’s probably only around eight companies, which are SPACS, special purpose acquisition companies.

So it’s a very new concept, it isn’t well known by the market in South Africa and for that purpose I’m working with Wits Business School to develop a course to educate practitioners. That means lawyers, charted accountants, CFAs analysts and investment managers to better understand SPACs and to help make the number of SPACs grow, so they can facilitate new investments in Africa. So that’s something that’s very interesting.

CIARAN RYAN: All right and you said the SPACs are already listed on the Johannesburg stock exchange.

RAJEN PILLAY: Yes, they’re all listed, but a very small number compared to the traditional listing, so there’s more, more than 400 companies which are listed via the traditional route and there’s only around eight companies which are SPACs, so it’s very, very, very new. The legislation was only finalized in 2013, so it’s about seven years old in terms of being in the market. But in terms of the study, which I conducted while I was at the University of Liverpool, the major reason why there’s only seven or eight SPACs in South Africa is because there’s a lack of understanding as to the rules, the regulations and the benefits of investing in SPACs. That’s why I’m trying to widen the knowledge base by talking to practitioners in other words lawyers, accountants, chartered accountants, analysts and investment managers. So, I mean, with the JSE, we were rather hoping that we can encourage and improve the awareness of this instrument.

CIARAN RYAN: And, and these eight that are listed there at the moment, are they just shelf companies or do they have operational assets inside?

RAJEN PILLAY: Yes, so basically of the eight companies are at different stages. Some of them recently been formed, some of them have made acquisitions and some of them are sort of looking for acquisitions. So in terms of the JSE listing criteria, you do the capital raise in other words an investment group gets together. They get the investment team together, the public subscribe for shares and inject liquidity. Once they’ve done that, the management team is then given a period of two years in which to find suitable assets and find suitable acquisitions and suitable businesses. So of the eight companies currently registered as SPACs in South Africa, those eight companies, depending on when they’re listing time was are at various different stages, some of them have acquired, some of them in the process of acquiring and some of them are still seeking, you know, possible acquisitions. So, it’s a very new history as far as that’s concerned.

CIARAN RYAN: How do you know it’s a SPAC? Does it have a special coding on the JSE?

RAJEN PILLAY: Yes, precisely. So it’s listed under a separate section called SPACs. Special purpose acquisition companies and it will remain there. So, what would happen is that an investment team would get together basically a small bunch of them, four or five of them that form a board. They’d incorporate the company that is listed on the JSE and then they’d raised the capital. The period from the time that they’ve listed on the JSE and raised the capital, they would remain under that section called SPACs when they complete a, what we call a viable acquisition and that might be in banking or it might be in agriculture, or it might be in textiles that SPAC then comes out of that section and gets relisted in the appropriate sector. So, if the team purchased assets in, let’s say clothing stores like Edgars or Edcon or whatever, they’d move into retail. If they made investments as we are busy now, Garuda’s Capital’s busy now at the moment for a banking and FinTechs SPAC that will be listed and be doing basically R3 billion to R4 billion capital raise in August. That will be the listed under SPACs the target is for banking and FinTech assets and when the SPAC completes that acquisition, it will move out of the SPAC section, it will move out into the banking sector listing on the JSE.

CIARAN RYAN: Okay and you said you’re busy developing a short course for the Wits Business School. When is that going to be available to the public?

RAJEN PILLAY: We looking to commence that in mid-August, so that’s your start middle August. The COVID story has heavily interrupted most universities and other universities have had now to go basically online. And then of course there was the June, July holiday period, so we, hope we kick this off now middle August this year.

CIARAN RYAN: Fascinating stuff. I mean, I think when the course is launched, maybe we should get you back on and talk to us again about that. And we’d have a little bit more time just to focus on the SPACs, but we have run out of time and if people wanted to get a hold of you, do you have an email address where they could reach you?

RAJEN PILLAY: Yes, rajen@garudacapital.co.za

CIARAN RYAN: Professor Pillay, I want to thank you very much for talking to us today on CFO talks, fascinating stuff. We covered quite a lot of ground there, we covered the Africa continental free trade agreement, we covered SPACS and we’d love to have you back on again in a very short while.

RAJEN PILLAY: Thank you Ciaran, much appreciated, enjoyable too, as well. Thank you.

CIARAN RYAN: Okay, goodbye now.

RAJEN PILLAY: Thank you. Thanks, bye. Bye.

Ciaran is a seasoned journalist and podcast host. He has a back-ground in finance and mining, having pre-viously headed up a gold mining operation in Ghana.In this podcast he interviews various CFOs, get-ting more detail on the role of the CFO and their daily challenges and solutions.


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