Finance South Africa

Taxes Not Laws Stamp Out Smoking

2007-02-02T12:48:00.000-08:00

Business Day February 1, 2007
Despite all the sound and fury surrounding tough new legislation on smoking, Finance Minister Trevor Manuel has emerged as the unlikely hero of the drive to reduce smoking in SA.

Public hearings have so far focused on the prohibition of tobacco advertising, tough new rules that will further restrict where people may smoke and a call for further restrictions on the industry.

A Cape Town economist has attributed the main cause of reduction in tobacco consumption to consistent increases in price.

University of Cape Town economist Evan Blecher told Parliament's health committee yesterday that, contrary to all the forecasts from the tobacco industry, tougher control laws had not had a negative economic impact.

In fact, the effect for tobacco companies was positive because all their revenues and profits were up.

This was also positive from a consumer point of view because fewer people were smoking and nowhere could it be argued that smoking was healthy, Blecher said.

He said that the first control legislation arrived in 1993 and for the next six years, until the law was made even stricter, the price of tobacco products almost doubled.

Total sales fell 25% and the total number of cigarettes smoked dropped 30%.

Advertising bans were introduced after 1999, but Blecher said one of the most effective tools had not been advertising bans or smoke-free areas. "The primary tool in reducing tobacco consumption" was excise taxes, he said.

Since becoming finance minister Manuel has strongly implemented the policy that excise taxes should amount to half of the retail price of tobacco products.

Blecher explained that in 1993 -- before the first control act -- excise revenue on tobacco products was at its lowest level in 30 years.

Also the share of the retail price that went to the producers was at its highest level ever, at 75%.

He said that since 1993, the price had trebled and the amount of excise tax collected from the industry increased to R4bn.

"It is all about consumption and prices. Dramatic changes in consumption occur as the price rises. Put the price up and people buy less, it is that simple."

Blecher said cigarette price rises were not due to Manuel alone; the industry had also increased its prices. Claims from the industry that the increases were solely due to tax were not true.

Cookie jar cocaine

2007-01-31T10:44:00.000-08:00

Fri, 19 Jan 2007
South Africa’s financial regulators sleep as the best minds in the private sector gorge on dividends of greed.

Nothing that happened in 2006 reduced the risks of the global financial system hitting a paranormal glitch and degenerating into a serious meltdown. Minor financial systems such as South Africa’s would be drawn haplessly into the maelstrom, and disappear down into the sewage pipes.

If anything, systemic risks increased during 2006. During the year, the UK’s super regulator, the Financial Services Authority (FSA), suggested that hedge funds could be the most potentially dangerous of legal creatures frequenting the global investment scene. The FSA identified 11 key risks associated with hedge funds, not least “serious market disruption and erosion of confidence”.

Around 10 000 hedge funds now populate the global financial scene. However, as the FSA states, it’s difficult to assess how many funds are operating due to “the largely unregulated and sometimes opaque nature of hedge fund operations”. Nowhere are hedge funds fully regulated.

The benchmark for hedge fund debacles remains John Meriwether, the once-fabled Salomon Brothers bond trader on Wall Street. Meriwether founded Long-Term Capital Management (LTCM), a hedge fund, in 1994. LTCM was populated with best-of-the-breed, including Nobel-prize winning economists Myron Scholes and Robert Merton, and also David Mullins, a former vice-chairman of the Federal Reserve, the US central bank.

Apparently smart investors, including the inevitable investment banks, charged to invest, pumping $1,3bn into LTCM up-front. Less than four years later, LTCM was technically bust; to avoid a possible systemic crisis in the global financial system, the Federal Reserve drummed up a $3,5bn rescue package from leading Wall Street investment and commercial banks. At one point, LTCM had around $1 400bn in gross exposures and, at one stage, displayed a leverage ratio of over 50 to one.

Hedge funds are among the supreme hyenas of the investment world. Many of their numbers (such as Meriwether) earned their dubious stripes at investment banks, where hyena royalty remains to this day. The growth of the hedge fund industry, and its size, may have galvanised recent interest by regulators, but investment banks remain the single biggest threat to the stability of the global financial system.

Investment banks deploy the muscle inherent in huge balance sheets, and exploit the brains of the brightest graduates available. These brains, which become scrambled within a relatively short period of time, are devoted almost exclusively to seeking and finding loopholes in the legal system, and exploiting the gaps like pirates hunting down hapless prey on the high seas.

Just as a high performance racing vehicle needs an appropriately qualified mechanic (politely called an engineer), investment banks work alongside lawyers, auditors, accountants and credit rating agencies. These combines go to extraordinary lengths to cover their tracks and confuse regulators and law enforcement agents, to say nothing of investors. On occasions, these royal hyenas are caught with their hands in the cookie jar. The results can be spectacular.

In June 2005, in a nine-to-zero decision of the US Supreme Court, erstwhile chief justice William Rehnquist ruled that Arthur Andersen, the once long-serving auditor of Enron, a Houston-based entity, had been wrongly found guilty on a single conviction of obstructing justice. Yet the failure of Enron ruined Arthur Andersen; its 2002 conviction forced 85 000 employees around the world to go find work elsewhere.

The perpetrators behind the Enron failure (beyond certain Enron executives) were, as it turned out, a motley crew of Wall Street investment bankers. Last year a US federal court approved a $6,6bn civil settlement by three of the banking entities accused of helping Enron hide financial abuses that led to its collapse.

There have been - or still are - Enron-related cases against, among others, JPMorgan, Barclays, Credit Suisse First Boston, Merrill Lynch, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank, and Royal Bank of Scotland. None of the investment banks that have offered settlements have admitted any wrongdoing. No doubt they’re all stone innocents.

Auditors and accountants – even when dressed in drag – can also stray, notwithstanding the innocence of the late Arthur Andersen in the Enron catastrophe. In August 2005, the US authorities announced that KPMG LLP, part of KPMG, one of the “big-four” global auditors, had admitted to criminal wrongdoing, and agreed to pay $456m in fines, restitution and penalties as part of an agreement to defer prosecution of the firm in respect of selling tax shelters between 1996 and 2002.

KPMG – “audit, tax, advisory” - admitted that it engaged in a fraud that generated at least $11bn in phoney tax losses. A US tax authority stated that “the only purpose of these abusive deals was to further enrich the already wealthy and to line the pockets of KPMG partners”.

If there is a golden thread in this putrid tale, it’s in conflicts of interest. On December 20 2002, New York State attorney general Eliot Spitzer announced a $1,4bn settlement with ten investment banks “to resolve issues of conflict of interest”. The names included most of Wall Street’s biggest: Bear Stearns, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, and UBS Warburg.

This breakthrough was accompanied by reaction to Enron. The US federal government enacted fierce new laws, not least Sarbanes Oxley, in full the Public Company Accounting Reform and Investor Protection Act. In the UK, there was the coming-of-age of the all-encompassing FSA. Believe it or not, some major pieces of new legislation have also hit the South African statute books in the past few years. But has anyone even heard of, for instance, the Securities Services Act, 2004? This statute has big and very sharp teeth.

The main problem is that South Africa’s regulators are just not up to scratch. Right now, there are a good number of disgusting deals present in the markets, right under the noses of the JSE, the Financial Services Board (FSB), Securities Regulation Panel, and Competition Commission. Ask the leading lights at these entities about why they’re sitting it out, and the buck gets passed. It’s very frustrating.

One of the reasons for the lack of action is the clear and present danger posed by lawyers. Teams of them move around like flocks of well-fed vultures. They arrive at meetings in large numbers, acting on instructions to intimidate by deploying mental pyrotechnics. If that fails, the lawyers are expected to issue direct threats, like bully boys bathed in testosterone during a break at school.

Conflicts of interest lie at the root of South Africa’s rotting corporate culture. Fortunes, running into hundreds of millions of rands, are being generated and paid as the dividends of greed. While global surveys continue to see South Africa slip in practically all rankings, concerns on the investment front are thankfully largely limited to errant investment bankers and their howling packs of professional supporters.

In the wider domestic financial markets, South Africa’s domestic hedge funds are small and ineffectual, and of nuisance value at best. There are, by contrast, some very big characters among the investment banking community. In Wall Street parlance, these characters are known as “big swinging dicks”. Let them swing, and let the vapours intensify.

Probe skills training in SA

2007-01-26T22:05:00.000-08:00

Probe skills training in SA
22/01/2007
Trade union Solidarity welcomed the launch of a R600m community survey on Monday, but asked that Stats SA also investigate the available levels of training skills in the country, a union spokesperson said.

"We should like to see the country's skills shortages, as well as the serious problem of mismatched skills, being evaluated by means of programmes that are based on reliable data," Solidarity spokesperson Jaco Kleynhans said.

He said a method of establishing the skills and training that are available among South Africans was needed.

The survey to collect demographic, geographic, social and economic data was launched by Finance Minister Trevor Manuel on Monday.

The survey, to be undertaken by Stats SA, would take three weeks to complete and the results would be published in October.

The survey would be suitable to study the shortage of skills in the country since it would not be necessary - as with a census - to include every citizen, Kleynhans said.

Power cuts are normal

2007-01-26T22:00:00.001-08:00

January 23, 2007
Last week's power cuts will not harm South Africa's economic growth nearly as much as some people have predicted, Finance Minister Trevor Manuel said yesterday.

"The numbers that they generate are complete and utter garbage ... It will not affect growth," Manuel said.

Manuel said Eskom's capacity was sufficient for the present and that it was normal for power plants to be shut down for routine maintenance, as occurred last week.

The cuts, which Eskom attributed to station maintenance and the shutdown of a unit at Koeberg nuclear power station, caused power failures from Cape Town to Johannesburg and Durban.

Meanwhile, Eskom will soon be flighting power alert messages on television to ask consumers to assist in the power crises by turning off all non-essential equipment.

In order to prevent instability and total blackouts municipalities all over the country have been requested to shed a percentage of their non-critical loads.

The eThekwini municipality is participating in the programme and has already put together a schedule that will be implemented in the event of it being necessary.

The power outages are expected to last for about two hours at a time.

eThekwini municipality's head of electricity Sandile Maphumulo said the department would "endeavour to notify all customers in advance of the interruptions".

He said the shedding would not only ease national capacity problems but would also prevent widespread outages that had the potential to cause "city-wide blackouts".

Tax fundis fear SARS is overegging the tax pudding

2007-01-12T11:24:00.000-08:00

ONE of the most controversial changes that the South African Revenue Service (SARS) introduced to SA’s tax laws last year was an initiative aimed at cracking down on businesses transactions that fell outside the tax net — the anti-avoidance rule.

Under the new general anti-avoidance rules, commonly referred to as “GAAR”, the receiver brought in far-reaching taxing powers to scrutinise all commer-cial transactions and decide whether to tax them.

Tax experts have since described the country’s taxation system as having experienced “a quantum leap in complexity” since the introduction of the worldwide basis for taxation, and capital gains tax.

“The introduction of complex tax legislation has resulted in loopholes, more sophisticated tax planning and, inevitably, more anti-avoidance provisions,” says Ernie Lai King, head of Deneys Reitz Tax Services.

How far will this spiral continue? Will SA eventually end up with a tax system which is as cumbersome as that of the US? And what happened to the call for simplifying SA’s tax system made by President Thabo Mbeki, among others?

These are just some of the questions tax fundis are asking.

Lai King says that the receiver has the right to change tax laws which it believes are proving ineffective, just as taxpayers have a right to reduce their taxes legally.

However, in its mission to combat tax avoidance and close every perceived loophole, the receiver must be cautious not to create an overbearing tax regime which could eventually restrict normal economic activity. Such an environment would be problematic, particularly in the imple-mentation of black economic empowerment transactions, Lai King says.

Section 103 of the Income Tax Act contains a general anti- avoidance rule. It describes an impermissible transaction as one that is entered into for the main purpose of obtaining a tax benefit rather than for commercial reasons.

The receiver has found that the rule is inconsistent and an ineffective deterrent. Banks, “boutique” structured finance firms, multinational accounting firms and law firms have also complained that it is increasingly hard to market complex and sophisticated tax “products”.

Every year Finance Minister Trevor Manuel has had to introduce amendments to tax legislation to deal with aggressive tax-avoidance schemes.

Meanwhile, SARS hopes that it will eventually be able to identify all the characteristics of the schemes.

This means that empowerment deals will be hit by the new rules and SARS has said that it will be keeping an eye on these transactions from this year.

Apparently, it has taken government about two years to develop the GAAR rules, in close consultation with stakeholders.

The 2006 Revenue Laws Amendment Bill, which amends the Income Tax Act, proposes that parts of section 103 be replaced with 12 new sections effective from 2 November last year.

It applies to any arrangement entered into on or after that date.

Under the GAAR rules a new commercial substance test is introduced.

The test seeks to determine the economic reality of the arrangement, examining the effect of a transaction upon a party’s business risks and net cash flows.

It also sets out indicators for lack of commercial substance. For instance, the avoidance arrangement may involve round-trip financing, which ensures the presence of an accommodating, or tax-indifferent, party.

Should an arrangement pass scrutiny, there is a final inquiry to be faced and that is whether the transaction resulted directly or indirectly in the misuse of any provision of the Income Tax Act.

Lai King says this very broad and subjective test is a move from the literal approach of interpreting the law purposefully.

“It can be problematic through the uncertainty that it is likely to cause.”

The rules also allow the receiver to presume that the sole or main purpose of an avoidance arrangement is to obtain a tax benefit and therefore adopt this presumption to any step or part of a transaction.

In other words, says Lai King, an individual step or part of an avoidance arrangement may be viewed as different from the overall purpose of the transaction.

Des Kruger, a tax director at commercial law firm Mallinicks Attorneys, says it is going to be difficult for corporate taxpayers who enter into transactions and arrangements of this nature in the near future to know whether they have covered the legal and tax implications.

Manuel's health data slammed

2006-12-23T14:08:00.000-08:00

The Free Market Foundation has taken issue with Finance Minister Trevor Manuel's claim that only 20% of the population receives private health care while government deals with the rest.

Policy researcher, Johan Biermann, notes in the foundation newsletter that Manuel had declared this in a recent radio interview.

"We need to be concerned when such an astute minister becomes persuaded by fallacious and persistently quoted figures, especially if the figures are used to formulate budgetary and overall government policy."

Statistics South Africa revealed the true picture, he argues. Its figures note that in 1995 the private sector constituted the "place of consultation" for health care for 32.2% of the population.

This rose to 42.2% in 2002 but eased slightly to just over 40% in 2005. The government sector as a place of health care consultation dropped from 67.8% in 1995 - a year after democracy - to 59.9% in 2005.

And Biermann argued that according to the National Health Accounts, in 1995 28.8% of the population who were not covered by medical aid, made use of private health services.

"Ten years later the General Household Survey 2005 found that just over 40% of all consultations took place in the private sector in that year and that 55.4% of the consultations in the private health sector were for patients not on medical aid.

"Clearly the private health sector is used by substantially more than the 16% of the population claimed by government."

According to the National Health Accounts, Biermann reports, in 1995 28.8% of the population who were not covered by medical aid, made use of private health services.

Ten years later the General Household Survey 2005 found that just over 40% of all consultations took place in the private sector in that year and that 55.4% of the consultations in the private health sector were for patients not on medical aid.

"Clearly the private health sector is used by substantially more than the 16% (an estimate of those covered by medical insurance) of the population claimed by government."

An assessment of the available information led to the conclusion that the government health sector spent taxpayers' money on a potential 54% of the population - which amounted to 24 million people in 2001, he argued.

"Consider further that relatively few people actually need medical care in any given year, and those who get sick suffer from a wide range of illnesses requiring a range of treatments, which differ in cost of provision."

According to the General Household Survey 2005, 10.3% of the SA population consulted a health worker - doctor, nurse or traditional healer - and 6.5% of the population received some form of medical treatment at hospitals and clinics in that year.

A Man Not Allowed to Do His Job

2006-12-23T14:07:00.000-08:00

IT IS impressive amnesia that allows Finance Minister Trevor Manuel and the Financial Services Board (FSB) to be shocked by Vuyani Ngalwana's decision to quit as pensions fund adjudicator over frustration at the lack of support he's received from government.

A mushroom cloud of deja vu pulses over this saga. Ngalwana is, after all, treading the same path as his predecessor, John Murphy, who also pleaded -- to no avail -- for help to allow him to do his job properly.

Murphy, now a high court judge, opened the first adjudicator's office in 1998. "At the time, I borrowed a cellphone and walked the streets of Cape Town looking for an office," he says.

Ngalwana built on his foundation and became a celebrity as he tackled the life assurers head-on, providing the most potent obstacle yet to the companies that had extorted consumers for decades.

Consumers reacted, and complaints grew 105% last year. But when Ngalwana requested extra budgetary firepower to hire lawyers to handle complaints, the FSB vetoed his request.

Last month, Ngalwana said he had been "stymied at every turn by persons who seem concerned more with procedural niceties than considerations of pragmatism" and that "resources are less than adequate... to meet our statutory mandate".

Last week, Murphy said he faced exactly the same obstacles as Ngalwana, before he quit six months before his contract ended in 2004.

One problem, he says, is that the FSB, which holds the purse strings, has a "natural tension" with the adjudicator.

"Often the reason you have a problem is because of a failure of regulation. If the adjudicator pronounces on something that has come about as a failure of the regulatory system, this reflects adversely on the FSB," he says.

He says it doesn't surprise him that Ngalwana's relationship with the FSB has become strained. "My relationship with them was also fractious," he says.

Ngalwana has given two major reasons for leaving.

The first is that the FSB won't increase his budget to allow him to deal with a crushing backlog of more than 3000 complaints.

The second is due to frustration caused by the legal rule that allows life companies simply to take his rulings to court and get them overturned "by default".

Now, while Murphy's complaints at the time didn't relate to his budget, he most certainly raised hell about a framework that he says is "totally unworkable" for the adjudicator.

"I made certain suggestions in my time as adjudicator about coming up with a different model and I was politely but repeatedly ignored, and not given what I needed to carry on," he says.

When it comes to court appeals, consumers don't have the cash to fund a battle, and the adjudicator is forbidden from defending his ruling in court.

So what happens -- as we saw in the recent Old Mutual case -- is that life companies typically get rulings in their favour by default.

As evidence, Murphy cites the fact that every time he was allowed to defend one of his adjudicator rulings in court, the ruling was upheld; every time he was forbidden from defending that ruling, it was overturned.

"We need to rethink the model, and we need a new model where either the adjudicator can defend his rulings in court, or the powers of a court to review rulings are limited," he says.

When it comes to the cash, Manuel says this year saw a "111% increase" in the levy on pension funds (now R2,50 a year, from R1,18 last year), and a 17,3% increase in Ngalwana's R15,9m budget. But how could that 17,3% hope to address the 105% increase in complaints last year?

If brown-shoed bureaucrats cannot see the need for more funds in a year when life assurers have finally been forced to atone for their greed, should they be holding the purse strings?

Ngalwana has done more than most to help consumers. Why is government willing to squander this political capital?

Poignantly, Murphy says Ngalwana's departure "leads you to question the commitment of those in the regulatory framework to seeing justice done".

The sobering part is that un-less the FSB appoints a simpering bureaucrat to replace Ngalwana, those in power will again feign shock when this scenario repeats itself in a few years.

Fuel tax must not be implemented

2006-12-23T14:06:00.000-08:00

The fuel tax that vehicle owners in the Western Cape will have to pay will prejudice the region's already overburdened fuel consumer, the Automobile Association (AA) said on Thursday.

The AA said in a statement that Western Cape drivers already pay substantially higher licensing fees than the rest of the country.

Moreover, the 10 cents a litre hike in the fuel price will make public transport more expensive, while "the people who can least afford it will be forced to live with higher transport costs and less disposable income for essential daily requirements".

Unacceptable to AA

The AA's comments follow the decision by Finance Minister Trevor Manuel to give the go-ahead to the Western Cape to increase the tax on petrol and diesel. The petrol price will rise by up to 10 cents a litre to start off with.

According to the AA, it has recently emerged that should an additional fuel levy be introduced, there was the chance that the monies would not be spent on roads or transport infrastructure. "This is also unacceptable to the Automobile Association," the group said.

"It is only a matter of time before the other provinces place the same additional burden on vehicle owners."

The group called on National Treasury to "consider the vast impact that the introduction of an additional fuel levy would have before making their final decision".

Training system fails to deliver

2006-12-23T14:05:00.000-08:00

Underperforming Sector Training Authorities (Setas) should be identified and improved to maintain the Setas system to produce skills.

Finance Minister Trevor Manuel said this on Tuesday after talks with the Federation of Unions of South Africa (Fedusa).

"It would be wrong to abandon this enormous potential for training and go back, or to recreate something else," he said.

"We have to recognise that is the shape of training and give it a shot".

The issue of training featured in the talks, including concerns around the dearth of artisans, such as pipe welders who had to be brought in from other countries to work at Sasol.

"We are worried that the training system is not delivering people," Manuel said.

Outgoing Ngalwana blames FSB red tape

2006-12-23T14:04:00.000-08:00

PENSION fund adjudicator Vuyani Ngalwana has blamed the Financial Services Board (FSB) for making it impossible for him to do his job, saying he would quit in April because he had been frustrated by the regulator.

He said he had been “stymied at every turn by persons who seem concerned more with procedural niceties than considerations of pragmatism”.

The FSB regulates how much money the adjudicator gets, but Ngalwana said yesterday that because the FSB had refused a request for more money to hire lawyers to deal with complaints the backlog was now more than 3000 and climbing.

This is the first time Ngalwana has put a number on this backlog, and the alarming volume shows it is now likely to take 15 months for his office to deal with a complaint, compared with the six months it took a few years ago.

Ngalwana said last month he would quit, and in his annual report he said Finance Minister Trevor Manuel should be aware that his “resources are less than adequate to enable us to meet our statutory mandate”.

Over the past two years, Ngalwana has clashed with life assurers over high costs and poor transparency on retirement annuities, a dispute settled a year ago when the companies signed a “statement of intent”, agreeing to introduce greater transparency at a cost of R3bn to themselves.

Because of the high profile his office has attracted as a consumer champion, Ngalwana’s office saw a 105% increase in the number of complaints last year.

Last year, the adjudicator’s office received 4901 complaints, 105% more than the 2387 in the previous year. To handle this load, Ngalwana asked the FSB for more funds to hire additional lawyers, but the FSB refused.

Yesterday Ngalwana said that “since I cannot accept responsibility for a failure of which we are not the cause, I must step down from this position and hand over to someone who could perhaps receive a more sympathetic audience from the regulator”.

The call for more resources had “sadly fallen on deaf ears”, with the result that the backlog was mounting.

Ngalwana criticised the “statement of intent” signed by life companies and Manuel in December last year. He said while the assurers guaranteed no more than 35% of a retirement annuity fund would be deducted in costs, they ensured their costs always amounted to 35% of a fund value.

“This is clearly not what the statement of intent envisages ... this is sad and leaves (consumers) no better off than they were before the statement was signed.”

The worst is yet to come

2006-11-26T09:37:00.000-08:00

South Africans who still think the series of interest rate hikes is about to end and that the rand is over the worst, must think again.

Matthew Lester, Professor of Taxation studies at Rhodes University, says chances are good that interest rates could hit 16%.

"I'm not saying it's going to happen, but it can."

South Africans haven't kept up with the economic changes that have taken place since February.

At the same time, no one is saving and people are still buying as if there's no tomorrow.

South Africa's salvation is that US Federal Reserve chairperson Ben Bernanke has put the brakes on interest rate increases in the US for now.

If those brakes come off, South Africa would have to keep on hiking rates to keep and lure foreign investors to the country.

Lester describes the flow of more than R25bn in foreign capital into the country as "unthinkable".

The role of the three T's (Thabo Mbeki, Tito Mboweni and Trevor Manuel) in the economy is greatly responsible for this.

The foreign capital is the glue holding everything together. If this should turn around, South Africa is in big trouble, says Lester.

South Africa's image abroad is "tainted" with incidences such as "Oilgate, Travelgate, Spygate and Armsgate".

According to Lester the last time the graph of the huge deficit on the current account looked so worrying was when Barend du Plessis was still minister of finance.

This deficit is greatly financed through foreign capital.

Lester predicts better days if:

The strong flow of foreign capital continues;
Credit growth declines from 25% to 15%; and
Oil prices stay at $60 a barrel.

He predicts bad times if:

The strong flow of capital tapers off;
Credit growth stays at 25%; and
Oil prices climb to $70 a barrel.

The worst-case scenario:

Capital stream runs dry;
Credit growth climbs above 25%;
Oil prices soar over $80 a barrel; and
Inflation goes into double digits.

Lester also referred to a comment from Finance Minister Trevor Manuel in February this year.

Manuel said at the time that South Africa shouldn't count on international circumstances always working in its favour.

Job-hopping black professionals

2006-11-20T12:50:00.000-08:00

Reserve Bank governor Tito Mboweni recently complained in Parliament that the central bank was unable to retain skilled black professionals.

When they join the bank, they purchase cars, houses and other expensive items.

This whets their appetite for more pay, resulting in them being susceptible to poaching by other companies. A few months down the line, they leave for greener pastures.

The context of Mboweni's complaint was that higher salaries for skilled black professionals raise demand in the economy with corresponding inflationary pressures.

On the face of it his argument seems to make sense. On another occasion, Mboweni introduced another element in his argument: he likes the Afrikaner assistants at the bank. They stay long enough on the job and become experts.

The combination of the first argument and the second is deadly for black people in general and black professionals in particular.

Black people want to fill in those places at the top - in fact employment equity legislation (partly Mboweni's brainchild when he was labour minister) requires it.

In fact his latter-day successor, Membathisi Mdladlana, is at war with big companies for lack of compliance.

But why are black professionals under attack from their leaders?

Black professionals are a symptom of the wrong things that happen in the market economy, which government leaders caused and are now unable to control.

Take Finance Minister Trevor Manuel's ranting two years ago against black accountants. He blasted them for being paid high salaries caused by a shortage of accountancy skills.

He argued that this was creating a barrier to new entrants. But where is the evidence that blacks are responsible for this, when in fact, the accounting profession has always been paid handsomely long before blacks were allowed to practice?

He acknowledged that it took long for a person to qualify as an accountant and there was also the problem of quality education in our schools.

In an almost similar tone to Mboweni's, he went on to draw a similarity between the salaries of black professionals and the extravagant pay hikes given to chief executive officers such as Steven Ross of Edcon and Gold Fields' Ian Cockerill.

Manuel cautions on race bias

2006-11-15T01:37:00.000-08:00

When awarding tenders for government projects it was important not only to look at the issues of race and gender representivity, but also at the tender specifications, Finance Minister Trevor Manuel said on Tuesday.

Speaking in the National Council of Provinces during question time, Manuel said one of the worst things he had seen was a road that was built where the contractors had met the gender and race specifications but had not met the specification of being able to construct the road. The road disappeared within two years.

While the minister did not indicate where the road had been, he said the disappearance of the road was not in the interests of the inhabitants of the area who used the road.

He said that it was also important that tenders awarded by municipalities were not adjucated over by municipal councillors. Indeed, this was the case in terms of the Municipal Finance Management Act.

While he was not certain of the requirements for officials at local government level dealing with tenders, he knew that the senior management service of the public service was required to register its members' interests.

Manuel also noted that he had visited the home of an Mpumalanga resident - who had received a state-subsidised home - and it was poorly constructed. It had been explained to him that it had been built by an empowered construction firm.

He said this was wrong.

"We can't do that to poor people," he said.

More brawn than brains in SA

2006-11-09T02:30:00.000-08:00

South Africa has a unique problem for a developing economy - more muscle than brains. It has more cash than it has quantity and quality of public servants to spend it.

That, says National Treasury, is in sharp contrast to economies such as India and China, where education and skill levels among public servants are high.

Government has consistently increased social spending year on year at a higher rate than economic growth. However, good news Budgets aren't translating into equally impressive expansions in services and efficiency.

A lack of skilled specialists, a high staff turnover, what's thought to be a high vacancy rate and what's known to be a befuddled human resource management system all have Cabinet worried. SA's 1.1m public servants can't do what's required of them - to manage the money they receive and put it to optimal use.

National Treasury chief director: expenditure planning Neil Cole says: "It's definitely a huge challenge." He cites a "lack of capacity" to use the money as one of the main reasons why the recent medium-term Budget Policy Statement didn't hand out more than the R80bn that was added to the public expenditure pot.

A study of the 2005/2006 annual reports submitted to parliament by national government departments show that some have more than 40% of all their approved posts vacant. Of 26 national departments, only eight have vacancy rates of less than 20% and only two departments have a single digit vacancy rate.

The sport & recreation department is currently running the highest vacancy rate. Of most concern, say Treasury officials, are those departments crucial to delivering basic services, key to the success of infrastructural projects such as Asgisa and the 2010 Soccer World Cup - including the departments of transport, trade & industry and public works.

Overall, it would seem that government is looking for 40 000 people to fill approved posts. But a study of government's personnel database or Persel system suggests that the number of vacancies stands at 318 000. The bottom line is that nobody really knows.

Bad financial management

Warnings concerning how badly finances are managed are a recurring feature of annual audits. In his assessment of 32 national departments, Auditor-General Shauket Fakie was able to give just three an unqualified thumbs up in 2005/2006.

Fakie says the root cause is people related: the lack of skills - especially in the financial sector and at senior management level. He calls for extensive training and skills building. "Currently, there's little guidance, monitoring and checks and balances. Performance management systems are an issue, since inadequate weight is placed on the system and isn't taken seriously."

The Democratic Alliance blames government's rigid affirmative action drive for the fact that it can't find enough competent people to do its work.

In September Minister of Public Service & Administration Geraldine Fraser-Moleketi reported that a national skills database will create a picture of the skills profile of the public service and inform redeployment of scarce skills to where they're needed and guide capacity building programmes.

Each cluster of departments will then design and monitor its own skills acquisition projects and programmes. That will go hand in hand with plans to increase the pool of middle managers who can apply for more senior positions.

However, the question is whether government packages and employment conditions will ever match the private sector's, especially in hard technical skills and management that private companies also seek more of.

The first is to ensure that professionals don't have to move into managerial positions in order to earn more. Coupled to professional career-pathing is the proposal to make professional remuneration packages market-related. Given the growing demand for some specialists, the key issue concerning that will undoubtedly be affordability - even for a government that's flush with cash.

Enter SA's education system. Engineering bodies estimate that the number of engineers leaving tertiary institutions is going to have to double (at least) to meet demand. However, last year's matric results highlight how the system is currently producing way too few potential engineers. Last year, 508 363 students wrote matric. Of those, 347 184 passed but only 86 531 received exemptions.

Meanwhile, the Joint Initiative on Priority Skills Acquisition (Jipsa) is expected to present a detailed skills and business plan to Cabinet this month. It will include proposals to recruit South Africans living overseas and draw from the retired pool of professionals. That's intended to be an interim measure until the education system's plan starts producing enough of the skills required.

Everything must go!

2006-11-05T09:53:00.000-08:00

Billions of rand go unspent in government departments, particularly at local and provincial level, each year.

SA Revenue Service chief Pravin Gordhan is set to collect an extra R30bn this year, so the pressure to throw money around just becomes greater.

With a lack of institutional capacity (one of the favourite euphemisms employed by the incompetent and the lazy) to do anything useful with all the scratch - a road, a few houses, a communal tap or two and maybe the odd non-Oprah sponsored school - it should come as no surprise that government departments make a big thing about the Budget vote.

A party is the easiest way to spend cash that's burning your pocket.

After all, not everyone can project manage a municipal water treatment plant, but everyone can throw a party.

And if you don't have a bash, someone at the Auditor-General may just get it into his head to reduce the funds allocated to you for the following year.

Anyone with an expense account knows that if you fly economy class or buy your clients blends instead of single malt this year, the bean counters will make sure that next year that will be all you can afford.

The principles of good budgeting are similar to a closing-down sale: "Everything must go!"

Thanks to the political opposition (no, not the Zuma, Ancyl, Cosatu axis of feeble this time) we know who the most savvy budgeters in the government are.

Every year the DA Chihuahua snapping at the heels of the ANC gorilla takes the trouble to ask a simple question, reports Business Day.

How much did you spend on your post-Budget party?

The response was good: 26 departments spilled the beans. They clearly have no compunction about living it up on the citizens' dime. Who are the big spenders in government?

This year's "Polony sarmy and orange juice" award goes to the Provincial & Local Government Ministry. They had no party. That probably means sandwiches and juice is the best they can hope for from now on.

Perhaps they didn't celebrate because Gauteng finance MEC Paul Mashatile already exhausted their state-sponsored Diners Club card at Auberge Michel.

On copious amounts of Jambon de Paris and Burgundy, no doubt, because even at that fine Sandton establishment, R96 000 goes a long way.

Environmental affairs, labour and finance also commemorated the Budget vote without having to resort to Essentiale and Rennies.

The "Krug and truffles" award goes to minerals & energy.

It hosted a party costing R281 517 - the most expensive of the lot.

With gold around $600/oz and mineral exports on the boil, that lavishness may be understandable.

Then there's the likelihood of a windfall tax coming from Sasol and the mining rights conversions. Expect this department to top the list again next year. Gold foil streamers, anyone?

Best improvement was shown by former Agriculture Minister Thoko Didiza, who must be expecting a bumper crop this season - from R1 500 in 2005 she pumped up the party and spent R77 527.

The departments of housing and communications chose to go the public-private partnership route and got sponsorships.

Which corporations it was that showed their commitment to the Budget process hasn't been disclosed, but it's the first time I've seen companies opting for voluntary double taxation.

Judging who deserved the "Vintage wine and vomitarium" prize posed no problem. At R136 524 it was only the fifth most expensive buffet on offer - but with only 36 invited guests it definitely was an all-you-can-eat-and-drink affair.

And the winner is... public enterprises. Minister Alec Erwin managed to have a do at R3 792 per capita.

I've had a few no-expense-spared chow-downs but have never been able to reach such proportions. It couldn't have been easy.

Let's assume it was all proudly South African fare. Remember, it was when Erwin was at trade & industry (they spent R162 421, number three on the 2006 dosh for nosh list) that the country's right to port and sherry was negotiated away - in exchange for what I've never really figured out.

So let's give Erwin the benefit of the doubt and presume he's not one to add insult to injury.

That takes expensive champagne out of the calculation, which makes it much more difficult for one person to eat and drink his/her way through R3 792.

If you can find it, three cases of 1987 Meerlust Rubicon may help. But even if everyone drank a bottle (not impossible) you're still left with around R3 000.

Even at the poshest of hotels, a lobster main rarely goes over R500 and a Cape Town venue for just 36 people couldn't have been that expensive to rent.

I just couldn't work it out. Then I realised that everyone must have received a party gift.

Perhaps a small generator for next winter's brownouts?

South Africans are living in cloud cuckoo land

2006-11-03T12:58:00.000-08:00

The latest great equities bull market started up on March 12 2003. Only time will tell, but for the meantime, this bull market terminated on May 9 2006, the day before the US central bank made further hawkish noises about interest rates.

During the period of the bull market described, the Morgan Stanley Capital International (MSCI) world index for equities appreciated by 98% in dollar terms, and by 86% in local currency terms.

South African stocks, like those in most emerging markets, rose by a far more impressive 173% in rand terms). The latest great bull market was some kind of a bull market, with many professional money managers and investors claiming the successes as their own.

But this bull market happened to coincide with synchronised economic growth in practically every country in the world. This was a first in history. Today, a post-mortem would show that the latest great bull market was driven by a twinned phenomenon which dragged the rest of the world along kicking and screaming behind it, but, happily, also in a forward direction.

The twins are well known. Over the past decade, combined US and Chinese economic output has increased from around 31% of the global economy to some 36%. As the Bank Credit Analyst has pointed out, the two economies have accounted for nearly half of world economic growth over the past five years. China's insatiable appetite for raw materials drove commodity and metal prices up to multi-decade highs, peaking just after the Federal Reserve rattled its cage on May 10 this year.

Resource-rich countries were dragged along, whether they liked it or not. South Africa found itself on the coattails of a huge bull market in equities, commodities and metals, and the good times were suddenly here. The tragedy is that while the lights were on in Pretoria, the policy makers were out, spending second-hand money that really belonged to people in countries where people were working hard, hard hours.

The hard truth is just starting to emerge, and if figures sometimes tell the story better than words or pictures, the focus would be South Africa's trade balance, the difference between exports and imports.

There is another dramatic factor at play here, in the form of the domestic currency. From early in 2002, when the dollar started into a protracted bear market, the rand started up a protracted bull market, through no design of policymakers in South Africa.

As the dollar continued to fall, currencies everywhere else strengthened, eating into local inflation. At the same time, the incredible productivity of Chinese workers fed through into lower product prices across the world, and inflation fell further, everywhere. The Chinese were also exporting disinflation, free of charge, by exporting their competitiveness across the globe.

This allowed central banks to cut interest rates. Consumer orgies started to get really messy. Cheap money mixed in with competitive Asian consumer products comprises a dangerous cocktail. In Pretoria, the lights were still on and the policymakers were still out, spending money fast. There is going to be a terrible price to pay for this madness. In the first five months of this year, South Africa's trade deficit (surpluses are history) exploded to R24bn, from R2,4bn for the same period in 2005.

A deficit is very different to, say, a personal loan, but both have to be financed. No policymaker in South Africa has given the vaguest hint as to how the trade deficit is going to be financed sustainably. Until now, it has been financed by inflows of foreign cash, attracted by South African equities and bonds. The clear and present danger is that any number of factors could see foreign investors turn the taps off. Foreign investors don't run charities, and domestic investors have shown a recent tendency to get spooked really easily.

From May 10 to June 26 this year, South African stocks fell by an average of 29%, in dollar terms. There has been a degree of recovery since, but the outlook is cloudy, to say the least. This may be a family show, but sensitive investors need to realise that South Africa's economic growth sucks. Proof of that pudding is conveniently to be found on the inside back cover of The Economist magazine, which displays economic and financial statistics for 30 emerging-market countries. At the top of the pops are China (of course) and Singapore, with economic growth rates above 10%. Brazil and Peru sit at the other end of the scale; South Africa is third from the bottom, with its economy growing at a miserly 4%.

Dig into this, and the story does get spooky. Contrary to the optimistic slime pumped out by public and private sector spin-doctors, South Africa's economic growth is largely jobless. Statistics SA's employment report for the first quarter of the year indicates job creation running at a pathetic 3000 jobs a month. Behind that, the bigger picture continues to ooze reminders of one of the highest unemployment rates in the world, running at 38% of the potential workforce.

South Africa is falling further behind its emerging-market peers as each second ticks by. In a recent paper, Curtis Mewbourne of PIMCO, the world's biggest bond fund, pointed out that for the first time in 2005, the combined nominal GDP (gross domestic product) of the so called BRICs (Brazil, Russia, India and China) was larger than that of Japan, the second largest economy in the world.

There is also that screaming reminder, that so hurts the ears, that the BRICs are growing at an average nominal growth rate of over 10%, versus 3% for Japan. "If those rates of growth continue," states Mewbourne, "then China's nominal GDP will be larger than Japan's within a decade." Mewbourne adds that China's economy is already significantly larger in PPP (purchasing-power-parity) terms.

The good news is that the global economy is likely to continue growing, despite a cooling at this juncture, in both the US and China. A quieter period may give South African policymakers an opportunity to realise that the game is up. Take, as a random example, this week's Transnet financial results for the year to 31 March 2006. The figures for this state-owned monopoly looked cheerful enough, with operating profit up 57% to R8,5bn.

Dig below the figures, however, and serious issues arise. Rail constitutes 39% of Transnet's assets and produces 69% of its revenues, but contributes just 24% of operating profits. Maritime (ports) constitutes 36% of the assets and produces 33% of revenues, but contributes 51% of operating profits.

Either something is dreadfully wrong with the rail division, or maritime clients are being horribly ripped off. Either way, maritime's operating profits are more than twice as big as rail's, thanks to China. Transnet's biggest domestic clients at the ports are the big mining companies shipping bulk products such as iron ore, coal, and aluminium.

The tragedy is that the iron ore line (Orex) running from Sishen to Saldanha and the coal line (Coalex) running to Richards Bay should have been upgraded and expanded years and years ago. The glaring gaps created by South Africa have been seized upon by the likes of Brazil and Australia, in particular. A cinema seat not sold tonight will never be sold, and a ton of coal not exported today is cheaper for the buyer tomorrow.

Policy makers seem to be determined to keep South Africa down amongst the slowest-growing emerging economies. Government, for example, is persisting with identification and development of so-called industrial development zones (IDZs). Everyone else knows that it should be converting existing IDZs to export processing zones (EPZs). The Coega IDZ has been an absolute disaster.

South Africa needs to take some big and bold initiatives. It is tempting to remind entrepreneurs that the country remains among the world's top cannabis producers and exporters, as shown by the recent UN 2006 World Drug report. There are also low-tech possibilities, such as a possible ambition to become the world's top baked bean producer. Amid the possible increase in gases, everyone in the country needs to take re-industrialisation very seriously.

South Africa has more money than it can spend

2006-10-30T07:10:00.000-08:00

South Africa has a problem many would envy -- more money than it can spend. In the 12 years since the fall of apartheid, ill-equipped officials have battled to distribute billions of dollars on vital programs from justice to social welfare.

Authorities say they are slowly getting better at dealing with such bottlenecks, but analysts say poor spending patterns still do not bode well for a multi-billion rand state spending plan meant to spur economic growth and create badly needed jobs.

Figures released by the National Treasury on Wednesday show nearly 9 billion rand (US$1.20 billion) in total went unspent in 2005/06 from the national and provincial budgets, up from just over 7 billion rand in 2004-2005.

Officials say that while a sizable chunk of that is because of inefficiency, it also reflects lower than expected debt service costs and cost cuts in some cases, as well as overlaps between provincial and national allocations.

South African Finance Minister Trevor Manuel unveiled the 2006-2007 medium-term budget on the same day and predicted South Africa's first ever budget surplus in 2007-2008 -- a coup for the steward of any economy, and especially one of an emerging market.

But Manuel immediately had to field questions on how he would defend this to critics who say conservative fiscal policy is untenable given widespread unemployment and poverty. He conceded underspending had hamstrung the executive's work.

Economists make a similar point.

"We can allocate all the resources we want to investment spending and infrastructure development [but] if there's no follow-through in spending, we won't get the economy moving in the way we want," said Colen Garrow, an economist at investment bank Brait.

South Africa's economy has been firing along over the past couple of years and last year chalked up growth of 4.9 percent -- the fastest pace of expansion in 24 years. But some economists say this demand-driven boom may fizzle out with consumers facing rising borrowing costs after having enjoyed the lowest level of interest rates in over two decades. They urge the government to take steps to fix structural weaknesses in the economy.

South African President Thabo Mbeki's government has committed 700 billion rand over seven years to upgrade rickety power and transport networks as it tries to reach a 6 percent growth rate in order to halve unemployment and cut poverty by 2014.

Economists say these projects may support the economy for now, but ultimately will not remove a core hurdle to future growth -- a dire shortage of key skilled professionals like engineers. That deficit is even more pressing as officials launch ambitious plans to improve public transport and build stadiums to accommodate some 500,000 tourists expected to stream into the country when it hosts the Soccer World Cup in 2010.

Analysts blame South Africa's small pool of skilled workers on crime and affirmative action -- the former repels foreigners who may help plug the skills gap while the latter has sparked an exodus of educated whites, they say.

Treasury officials say measures like easing immigration requirements to lure foreign skills should help while big projects may eventually yield a larger professional class as companies invest in training programs.

"The World Cup is not going to be the golden key to open the door ... it will not build dams and roads in rural areas," said Sampie Terreblanche, emeritus professor of economics at the University of Stellenbosch.

Urgent measures needed to restore trust in the life industry

2006-10-29T11:31:00.000-08:00

This time last year, Finance Minister Trevor Manuel intervened as Pension Funds Adjudicator Vuyani Ngalwana, in a series of high-profile rulings, set aside the confiscatory penalties levied by the life assurance industry when members of retirement annuity (RA) funds - often through no fault of their own - could no longer afford to pay their contributions/ premiums to RAs and life assurance endowment policies.

No matter what their standing in law, these penalties were and are morally unacceptable. The penalties can ensure that ordinary people will spend their retirement in destitution or be wholly reliant on the state.

These penalties were created to protect the life companies from any business risk and to enable them to pay their sales forces perversely structured upfront commissions on long-term contracts.

The penalties were and are simply the result of unfair, one-sided contracts in which you, as a policyholder, are put last.

After Manuel intervened, the life assurance companies signed a statement of intent to alter the contractual nature of these penalties, reducing them dramatically but not removing them altogether. The companies also agreed to pay some compensation to past victims of this unacceptable practice. In effect, the industry admitted its moral, albeit not legal, guilt.

The problem, however, is that Ngalwana stands outside of the agreement. He is bound by the provisions of the law and has been obliged to continue hearing complaints about the penalties. He has attempted to play the role of arbitrator within the ambit of the statement of intent.

However, last week, in a hard-hitting statement included in a new ruling, Ngalwana accused the life industry of playing lip service to the statement of intent.

Now the life assurance industry, through Old Mutual's unopposed appeal to the High Court, has succeeded in having Ngalwana's rulings on the penalties set aside. In other words, the life industry is legally entitled to levy the confiscatory penalties.

So now we have a situation where:

A court ruling stands in seeming contradiction to the life industry's agreement with the finance minister in that the High Court has found that the penalties are legal. Compared with the total profits made by the life industry, the R3 billion maximum that it will cost the industry to make good to policyholders is not a huge amount of money. It is a compromise that will not place undue strain on their balance sheets, but a total repayment of the penalties, as Ngalwana's rulings would have required, could have been too high.

The statement of intent has still not been put into effect and is subject to drawn-out negotiations involving the National Treasury, the Financial Services Board and the life assurance industry.
There is a destructive and unacceptable level of invective between the life assurance industry and the office of the adjudicator.
The adjudicator wants out of the job because he feels that he can do little more to change what he sees as a recalcitrant retirement industry, in much need of reform.
A mechanism exists whereby ordinary people can appeal to the adjudicator at very little to cost when they perceive they are unfairly treated.

But when the adjudicator's ruling goes in favour of the complainant and against the life industry, the industry can use its enormous financial and legal muscle to take the complainant to court to have the ruling set aside.

These actions will remain largely unopposed because individuals simply cannot afford the costs of ensuring that their case is properly represented in court.
The investing public is losing faith in a life assurance industry that has an increasingly tarnished image. The public's faith has been undermined by more than the confiscatory penalties.

The decline in trust has been exacerbated by things such as the exposure of the "not lawful" secret profits made in the retirement industry, the stripping of pension fund surpluses in favour of employers and the failure of the life industry to put you first. Sadly, there are indications that the life industry's tarnished image is spreading to the entire financial services industry.

The consequence of all this is that we will save less. This is not in our interests, the interests of the country or even in the interests of the shareholders of the financial services companies.

It is time for Manuel to intervene again, for the statement of intent to be put into full effect and for the life industry urgently to bring to market products that put you first.

In the meantime it is important that you keep saving, particularly for your retirement.

But you must look for investment products, such as collective investment schemes (unit trusts and exchange traded funds), that are not weighed down by high costs, unfair contract conditions and confiscatory penalties.

Slow start to capital spending

2006-10-27T09:41:00.000-07:00

The South African Government's focus on intensifying public sector capital formation has got off to a slow start, with spending only having reached about R80 billion in 2005/06, nearly R6 billion short of the previous year's medium term budget policy statement (MTBPS) projection.

This amounted to just 5.1 percent of GDP, with a GDP of R1.563 trillion.

In last year's estimate spending was targeted to reach 5.6 percent of GDP.

The MTBPS tabled in Parliament by Finance Minister Trevor Manuel reports that infrastructure expenditure for 2006/07 is likely to reach R101.3 billion, or 5.8 percent of a GDP figure of R1.75 trillion.

Hold on to this guy -- he's doing a good job

2006-10-24T02:42:00.000-07:00

If Finance Minister Trevor Manuel wants to keep the political capital gained from the new era of "pension democracy" created by Pension Fund Adjudicator Vuyani Ngalwana in the past year, he needs to intervene to prevent Ngalwana quitting his post.

Ngalwana has thrust a sabre into the stodgy soup that remains the incestuous pension fund industry, what with the life assurers and their patsy trustees conniving to disempower and bleed consumers dry.

Last year, Ngalwana's rulings changed the way the life companies operate, ultimately forcing them to commit to greater transparency at a R3bn cost -- a sea change matched only by Adriaan Vlok's decision to start hanging around Frank Chikane with a bowl of water and some soap.

Last year, Manuel defended Ngalwana, saying he had "full confidence" in him amid heated attacks from the life industry.

Manuel was spot on when he said in October that the attacks on Ngalwana created "the impression that the long-term insurance industry does not concern itself with issues of equity and fairness".

Now, with not enough funds to allow the adjudicator's office to deal with myriad complaints, and life companies going to court to get his rulings set aside unopposed, it is no wonder Ngalwana feels his office is being "made a mockery of".

Old Mutual, in particular, has gone to court to appeal against Ngalwana's rulings in favour of Belinda Holloway, Rajwantha Mungal and TV Freeman. In each case, Old Mutual warned its clients that if they opposed the matter, it might claim its legal costs from them (causing Holloway to withdraw). Old Mutual also opposed Ngalwana's application to argue in court to defend his ruling.

Perhaps as a response to being called bullies, Old Mutual wrote to Mungal and Freeman on Friday saying it would "not ask for cost orders" against either in "test cases to determine important legal principles".

This is a welcome concession by Old Mutual, but it comes as Ngalwana has questioned the bona fides of the life companies' "commitment to change".

Last year, there was much fanfare when, in a "settlement" between Ngalwana, the life industry and Manuel, the life companies agreed to pay R3bn to guarantee minimum values for clients who try to cash in retirement annuities early.

But since then, little has changed: the new Pension Fund Act remains wedged within the bureaucracy, and the life assurers haven't yet paid a cent of the R3bn as this money still sits in their coffers, earning interest.

In a blistering ruling , Ngalwana said life companies had breached the "spirit" of the "settlement" which, as a voluntary deal, was flawed anyway.

Ngalwana said that despite the "settlement", companies were refusing to settle disputes with their clients, saying that the costs they levy (up to 35% of an annuity can still be deducted in costs under the settlement) are "within the parameters of the statement of intent".

Ngalwana's 56-page ruling seemed to reflect his frustration with a "new deal" that promised so much but which delivered little. Given that Ngalwana is responsible for thrusting some primitive democracy into the life industry, Manuel has much to lose by letting him go.

Spend and deliver

2006-10-24T02:23:00.000-07:00

It is ironic that, while households are on a spending spree in South Africa, government seems unable to spend its money.

In his medium term expenditure plans to be announced this week, Minister of Finance Trevor Manuel is likely to disclose that the budget deficit - broadly the difference between revenue and spending - has narrowed further or even that it has been eliminated.

In part, this is the result of huge revenue over-runs by an increasingly efficient tax collection service.

But in part, unfortunately, it is the result of an inability to spend money allocated to central, provincial and local governments.

This failure to spend allocated money is one of the most serious problems facing South Africa today.

Money voted to relieve poverty, fight HIV/Aids, build infrastructure, feed school children or help new farmers is all too often not spent.

Even worse, some of those charged with the responsibility to spend the money do not seem to care whether it is spent or not.

Provincial and municipal officials sometimes do not even know that money is available to spend. Some of these managers take their duties so lightly that they do not even bother to turn up to give evidence before the committee when invited.

Having more money than we are ready to use

2006-10-22T13:02:00.000-07:00

Provinces may this year again underspend on money allocated to them by national government, Finance Minister Trevor Manuel warned.

Briefing journalists ahead of tabling the 2006 provincial and local government budgets and expenditure reviews in the National Council of Provinces, he said South Africa faced a unique challenge when it came to government spending.

"On the back of a robustly growing economy and efficient SA Revenue Service, we... find ourselves having more money than we are ready to use.

"I say this with the full knowledge that there may be many people who will find this hard to believe, given the levels of underdevelopment in South Africa."

"If one examines the spending patterns for the first quarter of this year, as contained in the... report published in July, it's not very hard to come to this conclusion."

"The report... that after three months, 25 percent of the financial year, spending of some of the grants was only at 14 percent... It's not hard to predict that if nothing changes during the course of the year, we might witness some underspending of some of these grants yet again," he said.

Speaking later in the House, Manuel said underspending was something government was generally concerned about.

"The problem of course is that underspending, and overspending, are both indications of the inability to plan. Some of this may be in our budgeting system, and this is something that we are looking at in a bit more detail at the moment."

When it came to spending on big capital projects, which could take many months to complete, there was "a bunching of appropriations at the front end".

These tended to be rolled over, which was "not the wisest use of financial resources", he said.

Why does SARS keep miscalculating?

2006-10-17T22:47:00.000-07:00

Is the South African Revenue Service (SARS) just chronically bad at budgeting? Or is the latest revenue overrun figure telling us something about the economy that we don’t know?

SARS commissioner Pravin Gordhan made a point of telling Parliament last week that his office had already collected R17bn more than expected in the first six months of the current fiscal year, from April to September. If that trend were to continue, it would imply a R34bn overrun for the full fiscal year, lower than last year’s record R44bn but still hugely over budget. With the economy expected to slow later this year, it’s unlikely the overrun will end up that high — Sanlam’s Jac Laubscher predicts R25,6bn while Efficient Group economist Dawie Roodt’s estimate is R12bn.

The point is, though, that the revenue projections announced by Finance Minister Trevor Manuel in the February budget will, once again, prove to be wildly underoptimistic, raising the prospect of a budget surplus, instead of a deficit, for the full year.

Of course, underpromising and overdelivering is better than the alternative, and the strong revenue collections of recent years have provided the space for government to increase social spending significantly while remaining fiscally virtuous. But after a while one begins to wonder why the revenue numbers never prove even remotely right — why SARS and the national treasury can’t seem to get a handle on what taxes can be expected for given levels of economic activity.

Sizeable overruns have been a feature of the past five to six years, and in earlier years they mainly reflected SARS’ successes in improving compliance, broadening the tax base and collecting taxes and duties more efficiently. Compliance-related activity by SARS is still estimated to account for 2%-5% of each year’s total tax take, and that raises the base in subsequent years. But in the past couple of years the main driver of the revenue overruns has been higher economic growth, rather than improved compliance. So the latest year’s (fiscal 2005-06) could be forgiven on the grounds that the economic growth rate came out at close to 5%, well above the national treasury’s original 4,1% projection in February 2005. But for the current fiscal year the opposite might be the case: the February budget forecast real economic growth of 4,8% for the fiscal year, or 4,9% for this calendar year. We’ll see in next week’s medium-term budget what revisions Manuel will make. But no one in the market is now that optimistic, with the latest Reuters consensus putting this year’s growth rate at 4,2%.

That would seem to make so much extra revenue more of a puzzle. But revenue estimation is far from being a perfect science, in SA or elsewhere. Gordhan argued in Parliament that there were macroeconomic factors that SARS’s models could not have anticipated. He pointed particularly to stronger-than-expected growth in consumer spending, which kicks into value added tax (VAT) collections as well as into corporate profits in sectors such as retail and banking.

August figures show revenue for the first five months of the fiscal year was up 15,6%, compared to the 8,6% increase budgeted for the full year, with VAT up particularly strongly and company income tax collections growing fast. We don’t yet have the September breakdown, but SARS monitors collections weekly or even daily and something clearly is happening out there. We know some of it. Gross domestic product (GDP) figures show the economy, excluding agriculture, was growing at 5,8% in the second quarter of this year. Also, second-quarter household spending was growing at 8%. Indications are that there was little slowdown in the third quarter and the SARS overrun seems to confirm that. In effect, as Roodt notes, revenue collections are benefiting from the sharp rundown in SA’s household savings rate — consumers are borrowing and spending, and the fiscus is taking a generous cut. That has to end some time.

Meanwhile, though, the behaviour of consumers and even of corporate citizens is proving unpredictable, as is its impact on the tax take.

But one simpler reason for the revenue overrun is that the targets set for SARS weren’t that demanding to start with. At 8,6%, the budgeted revenue is at most in line with, and probably below, nominal GDP growth for the year. SARS would have to do really badly not to beat the target by at least some margin. Which raises the question of whether and why it might be in Manuel’s interests to allow the underpromise and overdeliver revenue syndrome. In the current year, it’s likely not only that state revenue will be over, but that spending will be significantly under, budget, because of lower state debt costs as well as some departmental underspending. Chances are we will end up with a minimal fiscal deficit, or a small surplus, not the deficit of 1,5% of GDP pencilled in in the February budget. Government may not be entirely unkeen to see that outcome, but politically it’s hard to justify, at least in advance.

Revenue comes a knocking

2006-10-17T04:44:00.000-07:00

There's one - and only one - government department that functions efficiently. And that's the South African Revenue Service.

The rest unable to keep their financial affairs in order, dogged by corruption and incompetence, endlessly engaged in meetings and conferences where they squander our billions in taxes while the functions of their departments go unfulfilled.

We hoped, in vain, that with the advent of democracy we could look forward to a public service that delivered value for the hard-earned taxes we hand over to them.

However, flushed with its successes, it seems that Revenue is in danger of going a bit overboard in its eagerness to squeeze ever more out of us for the rest of the public service to urinate away.

It's targeting a reported 500 of SA's high net worth individuals, many of whom have received letters from Revenue advising them that their affairs will henceforth be handled by a specialised unit.

What's disturbing is that Revenue's approach could result in an assault on the constitutional rights of the individual to privacy. The individual is also entitled to fair administrative justice.

When the taxman suspects a taxpayer of evasion (not, mind you, avoidance, which is quite legal) then surely the authorities should audit the taxpayer instead of threatening him?

Why does Revenue now need to threaten individuals who are up to date with their returns and which it has accepted? Receiving a letter from Revenue that implicitly warns you that they're after you isn't a fair or reasonable approach to adopt on a scattergun basis in whose net innocent, law-abiding taxpayers are caught.

State funds must go to black bank

2006-10-16T02:57:00.000-07:00

A black-owned and controlled bank was needed to help accumulate “a critical mass” of black capital, says Black Management Forum (BMF) former president Don Mkhwanazi.

Speaking at a BMF conference in Durban, Mkhwanazi said what was needed was for the president to call an imbizo of premiers and their directors-general, mayors and city managers, the cabinet and their directors-general and CEOs of all state enterprises.

They would then be asked to deposit their budgets into a newly formed black-owned and controlled bank, he said.

Of the existing financial institutions he said: “The more they talk about change, the more they remain the same rooted in old practices — short-termism, a totally risk averse mindset and huge profits. Ask the thousands of young budding entrepreneurs if you want to confirm our assertion."

“Prior to Reserve Bank governor Tito Mboweni’s era there were plus minus four banks that showed serious black ownership and control. Unfortunately that is not the case today."

“There is nothing that these banks know like protecting their turf and reacting to competitive pressure. It will unlock the full potential of the country’s resources and make the established banks come to the party forever,” Mkhwanazi said.

Public Investment Corporation CEO Brian Molefe said black control of the JSE had ranged between 2% and 4% over the past five years.

The JSE’s market capitalisation increased 41% to R2,7-trillion last year and at the same time, there had been no new entrants to the list of black-controlled companies on the JSE, which currently featured only 22 black-controlled companies.

“As long as white capital finances black economic empowerment transactions for their own favour, there won’t be any transformation,” he said.

Mkhwanazi said black nonexecutive directors were window dressing if they did not help transform the companies they represented.

Inflation genie is out of the bottle

2006-10-16T01:56:00.000-07:00

Having relied too heavily on a strong rand over the past few years to contain inflation, the Reserve Bank is now going to have to raise interest rates aggressively to counter the inflationary effects of a weaker currency. The Bank has little choice in this matter if it is to regain its inflation-fighting credibility. However, it should not expect to win friends in this endeavour, because the economy is almost certain to cool abruptly in the process.

SA is a highly open economy, whose imports and exports each account for about 30% of its gross domestic product. As such, sustained movements in the country’s currency have a very strong impact on the price level.

Indeed, international experience with countries as open as SA would suggest that a sustained 10% movement of the currency could in time affect inflation by at least three full percentage points.

Over the past four years, the rand has been backed by a highly supportive international environment.

The country’s exports were boosted by strong economic growth in the industrialised countries and by very favourable international commodity prices.

At the same time, low interest rates in the world’s financial centres encouraged strong capital flows to the emerging-market economies.

In that favourable environment, the Bank chose to allow the rand to appreciate strongly from a level of around R11 to the dollar at the end
of 2002 to below R6 to the dollar by early this year.

The Bank did so rather than follow the Asian central banks’ more cautious approach in such circumstances of intervening in the currency market to prevent the currency from getting too strong.

Given the strong appreciation of the rand between 2002 and early this year, it is little wonder that the Bank so successfully achieved its inflation target.

Indeed, the Bank succeeded in bringing inflation down from a high of over 10% in 2002 to well within its 3%-6% inflation target by last year.

It did so while at the same time allowing the economy to grow at a highly satisfactory rate thanks in
very large part to the strong deflationary support it got from an appreciated currency.

If one lives by the sword one
finds, all too often, that one dies by
the sword.

Now that the exchange rate has weakened so dramatically in the past two months, the inflation shoe is very much on the other foot.

For if the rand stays at around its present level, it will have depreciated about 20% from its 2005 level.
In time, that could add at least five percentage points to the price level next year.

Having eschewed the use of foreign-exchange intervention to smooth currency fluctuations, the Bank has only interest rates on which to rely to influence the economy.

By raising interest rates aggressively, the Bank might hope to increase the relative attractiveness of holding the rand and put an end to the rand’s recent inflationary downward spiral.

By raising interest rates, the Bank might also hope to cool an overheated economy.

It might do so with the explicit purpose of avoiding second-round inflationary effects from the currency’s depreciation, which would further undermine its inflation-fighting credibility.

The degree to which the Bank might need to cool the economy through higher interest rates will depend very much on how the currency responds to higher
interest rates.

In the event that the rand were to strengthen markedly in response to an interest-rate move, the Bank would not need to raise interest rates to very high levels.

However, in the more likely event that the interest-rate response of the rand were muted, the Bank would need to raise interest rates to levels that would substantially constrain domestic demand.

I’m out of here

2006-10-15T09:43:00.000-07:00

The guy who shook who pension fund industry is to call it a day after getting too little backing from his bosses. A FRUSTRATED Vuyani Ngalwana will step down as the pension funds adjudicator in March next year when his contract comes to an end. He said that he cannot be effective with just 28 staffers.

The man who dealt a R3-billion blow to life assurers this year by exposing several problems in the administration of pension funds, said there was no point in him pursuing the fight on behalf of consumers without the necessary backing from his bosses.

He cited personality clashes and a lack of support from the Financial Services Board (FSB) as reasons for him wanting to return to private practice.

“I’m not interested [in renewing my contract]. I’m not getting support from the FSB to the level that would make my office effective. Perhaps it’s a personality clash issue,” he told Business Times this week. He was speaking on the sidelines of the Black Management Forum’s annual general meeting in Durban.

“Maybe my approach is not right for them and they get offended because I’m so direct ... so they hold back,” he added.

“To make the office more effective, perhaps someone with a softer personality — someone robust, but less aggressive — will probably have more joy with them [FSB]. You can be robust without being a bull in a china shop — as people view me.”

Ngalwana has issued a spate of rulings hammering the life companies for poor disclosure of the costs they levy on retirement annuities. The fallout has hit the reputation of these companies.

When he took up his post in 2004, his office had a backlog of 957 cases. Today the number exceeds 3000, and it is still dealing with cases lodged in January and February 2005.

He said the number of complaints received rose exponentially from 200 a month in June 2005 to about 420 a month in August. The office’s targeted turnaround time was six months.

The solution to the problem is more staff. But this is where Ngalwana has clashed with the FSB.

“It was impossible to address these backlogs and the increasing number of complaints with a staff complement of 28.”

The FSB would not approve more staff because “they just don’t understand our business model and strategy”, he said.

“If we can’t convince the people who pull the purse strings that we need more staff, then my work here is pointless.

“So, if I’m not going to have my staff complement increased to make my unit more effective, then I’m not going to be able to do my job effectively.

“If you have a clash at that level and they don’t understand this elementary need, then I can’t work with these people.”

FSB chief executive Rob Barrow denied there was a personality clash between his organisation and the adjudicator.

He confirmed there had been heated discussions about staffing, but said the differences were not an issue of failing to give Ngalwana support.

“It had more to do with trying to strike a balance so the pension funds industry isn’t overburdened with an increase in levies.”

The adjudicator’s office is funded by levies from industry, which are collected and managed by the FSB.

Barrow said levies went up by 108% last year, and the FSB was not prepared to “push it further”, so the adjudicator had to operate within the confines of the funding available.

“We had an absolute situation and there wasn’t enough money to give more. We all have to operate under constraints. At the end of the day, you and I pay his staff out of our pension funds.”

Rand's slide is likely to continue

2006-10-12T07:49:00.000-07:00

The rand has lost close to 19 percent of its value against the greenback since the start of the year. This makes it the worst performing currency in a basket of 71 units monitored by Bloomberg Financial Services.

Historical trading patterns showed that the rand could fall further before finding support at about R8.25. If the rand doesn't hold at R8.25, there is the possibility of further weakness - to the next major support level at around R9.75.

The weakness is due to the current account deficit, which was 6.1 percent of gross domestic product in the second quarter. The deficit is the difference between earnings on exports of goods and services, and the cost of imports.

The rand continues to keep company with currencies that have large current account deficits. The new Turkish lira has lost 10.1 percent, the Iceland krona 7.7 percent and the New Zealand dollar 3.8 percent.

Other factors are influencing the performance of the currency - the very hawkish comments from the Reserve Bank, along with ongoing uncertainty over the presidential successor and perceived renewed protectionism after the announcement of future import quotas.

Consumers are in way above their heads

2006-10-10T10:38:00.000-07:00

When did things get so pear-shaped? One moment it was all smooth sailing — inflation was at benign levels, interest rates were low, the economy was growing, and the current account was the least of our concerns. Then, in the space of just a few months, it all seemed to collapse. The Reserve Bank started warning consumers to stop spending so much, sometimes money they did not even have. Of course, consumers did not heed these warnings, which forced the Bank to act tough and tighten monetary policy.

But Bank governor Tito Mboweni and Finance Minister Trevor Manuel’s warnings came a bit too late — most consumers were already in way above their heads.

The irony in all this is that the very thing that has helped the Bank fight inflation — the rand — has become a potential threat to its targets.

Mboweni and his team probably regret cutting interest rates so drastically over the past few years. Although the environment of a strong rand and low interest rates helped to safeguard the inflation target, it sent consumers on a spending spree.

Petrol and food prices started to rise, and at the same time the current account deficit ballooned to a record 6,4% of gross domestic product (GDP), before narrowing to 6,1% in the second quarter. All this started to put the Bank into a bit of a panic.

Even international investors have started to shy away from our financial markets, as risk aversion to emerging markets increased and, in SA’s case, was exacerbated by the burgeoning current account deficit.

Runt of the currency litter

2006-10-08T09:14:00.000-07:00

FROM darling of the investment world back to being runt of the litter in 18 very volatile weeks, the rand now finds itself languishing at the bottom of performance tables. Since May 11, the currency has lost 22% of its value against the US dollar.

While there was no doubt the rand was overvalued at around R6/$, where it found itself for the first four months of 2006, vicious swings of the magnitude of the recent depreciation help nobody but the currency traders.

Many companies have taken the pain over recent years and restructured their businesses to cope with the R6/$ level. This can be good news because it makes them especially competitive at R7.66/$; but one cannot help but feel some job losses could have been avoided if management had not thrown in the towel because of the strong rand.

In addition, highly volatile swings in the currency make business planning extremely difficult. Sharp moves weaker tend to see companies passing on price increases as fast as they possibly can, despite the fact that the stock was purchased on the stronger rand.

A weaker rand has a habit of passing quickly through from producer to consumer. Which is why a producer price index figure like last week’s (9.2%) has everyone looking a tad uneasy — with Reserve Bank Governor Tito Mboweni’s recent rhetoric in mind. High inflation means high interest rates.

When the rand moves sharply weaker, it is bad for inflation, bad for interest rates, bad for bonds, bad for interest rate-sensitive equities and bad for property — but good for rand hedges and good for offshore investments.

What you tend to experience in times like these is the currency depreciation invoking a frenzy for any share that looks like a rand hedge. This is because the earnings of the company, in rand terms, are going to improve as the currency weakens.

When the rand was at R6/$ it made sense to hold rand hedge industrial (and commodity) shares at the expense of local consumer stocks. Also, investors were urged to take advantage of the opportunity to increase their offshore exposure.

The problem is that after a 22% decline in 18 weeks, it is extraordinarily difficult to call where to from here, and the movements of the rand hedges relative to the rest of the market have been extreme. So, if you are looking to aggressively buy rand hedges, I should warn you that to a large degree the horse has already bolted.

Spare a thought for the foreign investors in SA. In the first few months of this year they had the brokers beating down their doors to espouse the virtues of investing in a low-risk, high-growth market like ours, with a buoyant consumer and billions of spending on infrastructure to come set to underpin a continuation of the high-octane JSE performance.

Alas and alack. As at May 11 the JSE had returned 23.4% in rand terms and an impressive 29.7% in dollar terms for the year to date. Since then rand investors have added a further 2.9% (mainly due to strong performance by rand hedges), while dollar investors have parted with 19% of their investment value because of the weakening rand. The total year-to-date performance by the JSE in rand terms now reads 26.9% versus 4.6% in dollar terms. Eish.

New lows

2006-10-03T02:19:00.000-07:00

The South African economy tested a host of records last week - none of them good - and the prospects for growth continue to worsen.

At the beginning of the year, economic growth of at least 5 percent seemed a sure bet, but the latest economic survey puts growth for the year at only 4,2 percent.

Finance Minister Trevor Manuel is likely to lower the government's growth forecast from 4,9 percent when he presents his medium-term budget policy statement to Parliament this month.

The main driver of the slowdown will be higher interest rates, which will curb consumer spending in an effort to keep inflation between 3 percent and 6 percent.

Despite two rate hikes and repeated warnings by Reserve Bank Governor Tito Mboweni that consumers must exercise more restraint, demand for credit by the private sector soared by a record 25,8 percent in the year to August compared with the same period a year earlier. In the year to July, credit demand grew 24,8 percent. Analysts expect another rise in interest rates this year.

While rising rates and the weaker rand are expected to slow spending on imported consumer goods, capital equipment imports needed for the massive infrastructure development programmes of Transnet and Eskom are likely to keep the trade deficit worryingly high. This will put even more pressure on the rand amid concern that the country will struggle to plug its current account deficit.

A widening deficit implies that more rands have to be converted into foreign currency to pay for imports.

The rand has been falling in the past six months as the current account gap, which includes services and dividend flows, widened to a 24-year high.

An accident waiting to happen

2006-10-02T08:13:00.000-07:00

THE rand’s collapse over the past few weeks was an accident waiting to happen. As such, it should not have taken SA’s policy makers by surprise. For, far from being primarily the result of the vagaries of the financial markets, the rand’s recent collapse was more a reflection of past policy mistakes that allowed the rand to become highly overvalued and that allowed the external current account deficit of the balance of payments to balloon.

Among the more depressing aspects of these developments is that they underline how little the Reserve Bank learnt from the rand’s exchange rate crisis at the end of 2001. One would have thought that the harrowing experience of that crisis, which saw the rand in virtual freefall, would have made the Reserve Bank more wary about ever again allowing the rand to become overvalued and about leaving the value of the currency to be purely market-determined.

One would also have thought that the Reserve Bank would have seized the first opportunity with which it was presented, as did the east Asian countries following the 1998 Asian currency crisis, to build up a veritable arsenal of international reserves. One might have expected the Reserve Bank to do so in order to ensure that it was never again in the position where it lacked the necessary foreign currency reserves to smooth currency fluctuations and to prevent the currency from becoming a one-way bet.

Rather than lean heavily against the wind during the period of highly favourable international conditions for emerging markets of the past three years, the Reserve Bank largely stood by as the rand steadily appreciated from its low of more than R12 to the US dollar in early 2002 to below R6 to the dollar this year. It did so despite the fact that such a move resulted in a currency level that was substantially overvalued by any reasonable yardstick.

The degree to which the rand had become overvalued by early this year is suggested by the recent dramatic widening in the external current account deficit. Despite highly favourable international commodity prices and robust global economic growth, by the first quarter of this year the current account deficit had widened to 6,5% of gross domestic product. This was the widest the deficit had been for the past 24 years.

In a world of ample global liquidity, the recent ballooning of the current account deficit would not be of much consequence. But in a world where global liquidity is being drained in the US, Europe and Japan, the ballooning deficit was bound to draw attention. It would seem to be no mere coincidence that the recent pressure on the rand has coincided with similar pressure on the currencies of Hungary, New Zealand and Turkey, which all suffer from gaping current account deficits and over-valued currencies.

At the time it raised interest rates last month, the Reserve Bank suggested that high oil prices and a weakening currency could raise inflation to 6,2% by mid-2007. If that were to occur, inflation would rise to a level above the upper bound of the Reserve Bank’s 3%-6% target range. Since the latest interest rate hike, the currency has weakened by a further 10% to its present level of R7,40 to the dollar, which threatens to push inflation up towards 7%.

Lacking an arsenal of international reserves, the Reserve Bank is not in a position to follow the interventionist style exchange rate policies that the east Asian countries adopt when their currencies come under pressure. Instead, it is reduced to having to hike interest rates both to stabilise the currency and to prevent past movements in the currency from undermining its inflation target.

The problem with a pure interest rate defence of the currency is that it might involve having to raise interest rates to uncomfortably high levels. As Turkey has demonstrated over the past few weeks, even sharp interest rate hikes are not always sufficient to stabilise the currency. This is a great pity since it runs the very real risk of putting an end to the economic recovery with all of the social dislocation that a recession involves.

Black economic empowerment in action

2006-10-02T03:01:00.000-07:00

As the sordid details of the slain Brett Kebble’s wrecked corporate carcasses continue to emerge, so it becomes increasingly apparent that none of his black economic empowerment (BEE) deals are left standing. In life, Kebble was feted for his so-called dedication to BEE, but in death he is shown to have been a BEE fraudster. Kebble took BEE fronting to inter-planetary levels.

Auditing firm Umbono’s forensic investigation into the affairs of Randgold & Exploration (R&E) (where Kebble was CEO from July 24 2003 to August 31 2005) has unearthed at least two horrifying cases of BEE fraud. In 2003, R&E issued 8,8m of its shares – then worth R260m - to Equitant, a BEE entity that turns out to be the alter ego of two other BEE entities, Viking Pony and Phikoloso (the main front). All were Kebble creations.

The evidence unearthed to date shows that during September 2003, 2,3m of the shares mentioned were sold for R74m. Most of this – R46m - was used to buy 56m JCI shares, still held in early 2006 by stockbrokers T-Sec on behalf of Equitant. A further R20m was transferred to account of Itsuseng Strategic Investments (another BEE entity) in the books of T-Sec; R7m was transferred to Société Générale, Johannesburg.

On August 28 2003, Equitant, purportedly represented by George Poole, then employed by Consolidated Mining Management Services (CMMS, Kebble’s biggest slush fund), opened an account for Equitant at T-Sec.

On September 3 and 5 2003, 3,1m of the R&E shares (worth about R94m at the time) were transferred to an account in the books of an entity Kebble used to channel stolen cash. Between September 2003 and January 2004, 3,3m of the R&E shares (worth about R101m) were transferred.

The bottom line is that of the original R260m worth of R&E shares issued into the Phikoloso BEE transaction, and sold for cash, practically not a cent went to BEE.

The forensics found that the quid pro quo for R&E issuing R260m worth of shares into the Phikoloso deal were valuable shareholdings supposedly held by Viking Pony in Anglo Platinum, Harmony and Aflease. Forensics found that investments in these shares were in fact fictitious and supported by false broker notes. The non-existence of the shares was further disguised in scrip lending agreements and by way of false broker confirmations and false legal agreements. Ouch.

In court papers, it was acknowledged that the Phikoloso transaction was simulated. Last month, R&E succeeded in pushing Equitant and Itsuseng into provisional liquidation. Both cases have, however, been settled on the basis that the two entities were duped by Kebble. Itsuseng chairman Andile Nkhulu successfully contended that Itsuseng participated in the Phikoloso transaction in good faith and was itself the victim of allegedly fraudulent activities.

Kebble double-fronted Phikoloso by introducing a host of other ‘beneficiaries’ to the transaction. The further victims included Lembede Mining, New Line Investments, Marothodi Resources, Ikamva, Leswikeng, Innovage, Qaqambile Capital Holdings, Khomelela, and Dyambu.

If Phikoloso was not catastrophic enough, there were also the Angolan diamond deals.

The R&E forensics found that “whether it was indeed the intention of the prior board to establish diamond mining operations in Angola is not certain.” The management of the concessions appears to have antagonised Angolan authorities; “expropriation notices in respect of all of the Angolan diamond concessions were received from the Angolan authorities in late 2005.”

According to earlier filings made by R&E with the Securities Exchange Commission in Washington, 8m R&E shares were issued into the Angolan diamond deals in five key transactions, four during June 2004.

Among the resigned directors listed are Kebble, two of his cronies, Hennie Buitendag and John Stratton, one of his patsies, Lieben Hendrik Swanevelder, and a complete unknown in Dimitrios Perrevos. Alas, the R&E forensics found that the total of 8m R&E shares ‘with a listing value of R162 million were issued to acquire various Angolan diamond concessions and then misappropriated.’

In terms of sheer size, however, little compares with Kebble’s fronting via Inkwenkwezi and Bookmark, two further BEE entities. According to the annual report for the year to March 31 2004 for JCI (where Kebble was also CEO), Inkwenkwezi was set to buy 11,6% of Western Areas (where Kebble was also CEO) from Anglo American.

Elsewhere came the helpful information that R&E had lent 9,9m shares in London and Nasdaq listed Randgold Resources to Bookmark, to finance Inkwenkwezi’s purchase of 19m shares in Western Areas. The current value of the 9,9m Randgold Resources mentioned shares is a cool $203m. What is now known is that Kebble sold and misappropriated cash of R1,8bn via illegal sales of Randgold Resources shares out of R&E from 2002. The Inkwenkwezi BEE deal is all but dead.

Thankfully, Kebble’s swansong BEE confidence trick never really got off the ground. This was the Orlyfunt fantasy, announced in December 2004. Here, JCI was to sell its portfolio of BEE joint venture investments and various mineral right interests to OrlyFunt for R1,4bn. The usual BEE victims were sucked in: Lembede, Dyambu, Itsuseng, Koketso, Ikamva, plus Kovacs, Umoya, Masupatsela and even Sekunjalo.

JCI’s 2004 annual report devoted several pages to summarising group BEE interests. Page sixteen showed that shareholders were given the value of “empowerment funding” that JCI had derived from BEE to the tune of “R1,6bn.” It is impossible to find details of the R1,6bn anywhere in the annual report or its financial statements. It was one piece of junkyard scrap after another: JCI Telecommunications, JCI Pharmaceuticals, JCI Engineering, JCI Finance and Equity Holdings, and so on.

This leaves JSE-listed Matodzi, which Kebble always described as his “flagship” BEE entity. Matodzi’s only real asset, its 50% stake in Letseng Investment Holdings (LIH), was dumped into Matodzi on July 1 1999, when Matodzi was known in investment banking circles as Kebble’s “dustbin.” Matodzi paid for the diamond assets with preference shares, recently recognised to be disguised debt.

Matodzi last week converted this debt into equity, pushing JCI’s stake in Matodzi from zero to 59%. The irony is that the underlying asset in LIH, the Letseng diamond mine in Lesotho, is not subject to South African BEE laws.

What is a windfall tax anyway?

2006-10-01T01:14:00.000-07:00

South Africa’s energy and mining industries are awaiting announcements from the finance ministry which could have significant investment implications for both of these vital sectors.

The energy industry, particularly fuel and synthetic fuel companies, are awaiting the outcome of an investigation into the imposition of a possible windfall tax while the mining industry is still sweating over details of the proposed imposition of mining royalties on revenues with effect from 2009.

The energy industry is likely to know its fate first as the task team appointed to consider a windfall tax handed its report to Finance Minister Trevor Manuel last Friday. The idea of a tax was first mooted by Manuel in his annual Budget presentation in February. Mining royalties were first proposed in 2003, but there have been several delays in revamping the initial draft which recommended revenue-based royalties of between 1% and 8%.

While finance ministry spokesperson Thoraya Pandy can give no indication of when Manuel will make a decision on the fuel industry windfall tax report, industry sources believe it will be within the next few weeks. Pandy confirmed last week that Manuel will unveil the updated draft of the Mining Royalties Bill before next February’s national Budget.

The windfall tax on the fuel industry is being considered at a time of rising concern over potential fuel shortages. Oil companies, such as Sasol and Engen, are considering multibillion-rand investments to expand SA’s fuel production capacity. Sasol is also in negotiations with the government over developing a synthetic fuels refinery that could cost more than R30 billion to establish.

Though the country’s entire oil industry, including Sasol, PetroSA and large multinationals such as British Petroleum and Shell, may be affected by a windfall tax, the emphasis of the task team’s investigation has been, however, on the synthetic fuels industry which is dominated by coal-to-liquids and gas-to-liquids producers Sasol and PetroSA.

Of three windfall tax schemes the task team was investigating, a scheme last implemented in 1979 was the most likely to be introduced.

That scheme saw synthetic oil producer Sasol receiving subsidies if the oil price fell below $US28 and reimbursing government if oil prices rose above that level. However, a new scheme would be based on a higher oil price to reflect current price realities.

The other two schemes were a cost-based administered price regime and a formula-based progressive profit tax similar to that applied in the gold-mining industry.

Not nearly enough jobs

2006-09-28T04:52:00.000-07:00

South Africa isn't creating new jobs fast enough. That remains the case, despite the welcome fall in the official unemployment rate in the year to March 2006, from 26.5% to 25.6%. More than half-a-million new jobs were created over the period. The President, living in his own insulated world, does not seem to think that there is a problem.

Bear in mind that the slight fall in the unemployment rate was achieved at a time when the SA economy was booming. It's not yet clear whether the unemployment rate will continue declining.

Looked at over a longer period, the unemployment rate has stabilised compared with March 2001, the earliest available figures.

The total number of unemployed people remains worryingly high. Without discouraged work seekers, there are 4.3m unemployed people in SA. When you include discouraged work seekers, the number stands at close to eight million.

The unemployment rate including discouraged job seekers is 39% - below the levels above 40% that have been reached before, but still in the stratosphere.

The release of the latest unemployment figures reminds us that President Thabo Mbeki last year expressed scepticism about the accuracy of the numbers. Mbeki doubted that an unemployment rate of around 26% was correct - the more accurate rate of about 40% just didn't even feature in his thinking. Mbeki argued that if the unemployment numbers were correct, and more than 4 million people were actively looking for a job, they would have been far more visible in their demands.

Mbeki was widely disparaged for his view, and he hasn't seen fit to reiterate it. But it's well worth asking how nearly eight million people without a job survive. One important answer is that there has been a massive increase in the welfare grants given out by the state.

For entire families, these grants are the only way to survive.

Finance Minister Trevor Manuel said in his Budget speech earlier this year that growth in income support to vulnerable households has been the fastest growing category of government expenditure since 2001.

Any excuse for a party

2006-09-26T01:39:00.000-07:00

South Africa need a culture of responsibility in spending taxpayers' money in a country where there is mass poverty. Minister of Finance Trevor Manuel himself has questioned the necessity of holding big dinners and handing out T-shirts at budget time. Here is a fine example on how the rank and file ignores his advice.

The list of those who attended Gauteng Finance MEC Paul Mashatile's R96 000 dinner party seems to grow every day.

Last week it was revealed that the MEC for finance and economic affairs had hosted a post-budget-speech party at an exclusive French restaurant in Sandton and that the bill for the evening amounted to R96 000.

At the time, his spokesperson, Percy Mthimkhulu, said the dinner was held to celebrate the delivery of the 2006/07 budgets for the Gauteng Shared Revenue Services and Economic Development departments.

It now appears that a third department, the Gauteng Treasury, was also part of the celebrations. It has also emerged that the bulk of the people attending the party apparently sat outside on a chilly June evening.

Initially there was no official word on how many people were invited or who had attended, but now Mthimkhulu says more than 200 people attended.

The function was held at Auberge Michel, where a bottle of spring water costs R125.

The restaurant seats only 70, putting the cost per head at R1 370. The cost per head for 200, with most of them sitting outside, would have been R480.

Mthimkhulu said the owner of the restaurant had made special arrangements' to accommodate all the guests.

He added that members of the executive council were entitled to use their official credit cards to host guests as part of their official duties as representatives of the government.

Mthimkhulu said it was standard practice for MECs to host budget dinners after the presentation of their budget speeches.

The truth about the economy

2006-09-23T07:49:00.000-07:00

The South African minister of Finance is the darling of local econmists. So many people thinks he is doing a good job, they are voicing their support for him as the next President. In reality, he is merely the least incompetent minister in the Souh African cabinet. It’s time to put the spin into shredding machines, and examine the hard facts that formed today’s precarious bubble

Finance Minister Trevor Manuel said that the South African economy is growing at unprecedented levels”. How is that possible, with the current-account deficit also on the increase?

What factors contribute to increases in the current-account deficit? The current-account deficit, let’s call it CAD, has roared into South Africa’s economic lexicon with a vengeance in the past few months. It will shortly become a big issue in the political establishment, and remain there for years to come.

The current account of the balance of payments is the widest measure of South Africa’s trade, and hinges heavily on its single biggest component, the trade account. South Africa’s balance on its current account was last positive in 2002, when it comprised 0,6% of GDP. Then the balance plunged into deficit in 2003, at –1,3% of GDP (gross domestic product). The conversion from positive to negative, producing a CAD, is attributable to South Africa turning from net exporter to net importer.

The dollar terminated a six-year bull market early in 2002; practically all other currencies then started up bull markets. This made imports to South Africa less expensive, and progressively yet even cheaper as China continued to export its astonishing productivity gains into the rest of the world. Inflation fears went onto the backburner everywhere, and interest rates started tumbling.

The South African core interest rate peaked out at 13,5% in September 2002; it was to nearly halve in the years ahead, fuelling an orgy of consumer spending. The world order changed quickly; the US and China accounted for a breathtaking 45% of global GDP growth from 1996 through 2003. The US morphed into the world’s consumption engine, fed by China, the production engine. The two countries dragged the rest of the world along, with China’s voracious demand for raw materials booting practically all dollar metal and commodity prices to multi-decade or multi-year highs by 2005-6.

Somewhere, South Africa lost the plot. The recently released Economic Freedom of the World Annual Report (EFW) 2006 shows South Africa retrenched its economic freedom competitiveness ratings to levels last seen before 1995. The country dropped in a year from No 37 to 53, of 130 countries surveyed.

By now, investors are familiar with the general retreat from equity markets (in general) and emerging-market currencies (in particular) in May and June this year. Worst affected were countries where asset prices had previously risen sharply (such as equities in Colombia and India), and exchange rates of countries with high CADs (such as Turkey, South Africa, and Hungary).

The International Monetary Fund anticipates that South Africa will post a CAD of –5,5% of GDP for 2006 as a whole. This is simply far too high; 3% is the prudent limit accepted by most observers. China, by comparison, is expected this year to produce a comparative figure of more than +7%. Investors really don’t like CADs; the Morgan Stanley Capital International indices show that Turkey is the worst performing “investable” country stock market of the year, measured in dollar terms. Ignoring war-affected Israel and Jordan, South Africa ranks number two behind Turkey, and Hungary is not too far behind.

As for the story that the South African economy is growing at unprecedented levels, that’s spin. The IMF conveniently chops Africa up into different regions. South Africa is considered to be in its own zone; its expected growth of 4,2% is the lowest listed in Africa.

What policies can be put in place to reduce the current-account deficit for South Africa? Here, it is useful to defer to a speech given to the UN general assembly by Fradique Bandeira Melo de Menezes, president of São Tome and Principe, who said “it is time we faced some of the unspoken truths about poverty”.

De Menezes said that although historic problems and a lack of resources can be critical, the single biggest factor is bad government. If South Africa doesn’t have bad government, it certainly has shocking government. The EFW ranked South Africa particularly poorly on the size of its government. Despite huge transfers of subsidies and cash, the South African government fails not only to meet service delivery expectations of its hapless population, but also of the international community. Cynics point to superfluous government departments, such as Sport and Recreation, and Arts and Culture, and also the pathetically failed R5bn Sector Education and Training Agencies (SETAs).

But government wants to be even more, not less. In a recent speech on another awkward acronym, AsgiSA (The Accelerated and Shared Growth Initiative for South Africa), Deputy President Phumzile Mlambo-Ngcuka said AsgiSA “interventions” would be made in macro-economics, infrastructure, delivery and governance, the second economy, skills development, sectoral development and in the provinces.

There are enormous possibilities, if only government would get the hell out of the way. The EFW published a table of countries by manufacturing exports per capita, where South Africa ranked number 68 at $148 a person, trailing the likes of Swaziland ($382) and Lesotho ($176). But then compare the giants, like the number one, Singapore, with $25 336 a person, and Hong Kong with $23 345. It is no coincidence that in the overall global EFW index, Hong Kong retained the highest rating for economic freedom, followed by Singapore.

There is no panacea; as the EFW report puts it, “in knowing what will succeed. Economic freedom fosters competition and multiple attempts to find things that work, and weeds out the many failures”. The tragedy is that planners cannot have enough knowledge of the complexities of success; worse, they suffer from the delusion that they already know the answers.

Finance Minister Trevor Manuel apparently has little to offer in solving the CAD conundrum. He recently said that “trade data suggest that we are now running a balance of payments current account that is significantly different from zero, statistically speaking, and the number has a negative sign. This is not a bad thing in itself – we need to grow, and in order to grow we need to invest and modernise, and to some extent we can draw on international finance to bridge the gap between domestic savings and investment”.

Likewise Tito Mboweni, governor of the Reserve Bank, the central bank. To his credit, Mboweni this year started to mention the CAD in his speeches, more than once. He even mentioned it five times earlier this month in an address to the Central Bank Governors’ Club, in Irkutsk, Russia. He argued that while the CAD was “more than adequately financed by capital inflows, these are mainly portfolio inflows, which increase the risks of adverse movements in the exchange rate, especially if the current-account deficit is perceived to be unsustainable”.

The CAD is far from the only, or the most difficult, challenge facing South Africa. The final words go to De Menezes, president of an African state, in his further listing of the lethal agents that foster and entrench poverty.

De Menezes graciously told the UN audience: “When states do not protect property and people; when national revenues benefit self-interested political insiders who oppose any actions that would lead to more equal distribution of income and resources; when government officials waste funds; when people are hired on the basis of being from the right family or region or political grouping; when nobody monitors government spending; when corruption is noted but never punished, and illegal activities are not restrained by law, the press or democratic opposition, then miserable results follow.”

Don't be so harsh on corrupt regimes

2006-09-19T03:36:00.000-07:00

Britain has said it might withhold £50m ($94m) from the World Bank in protest at its tough policy of withdrawing loans to nations deemed to be corrupt.

The World Bank will reveal in November how changes to its policy on aid conditions are being adopted. Only then will British Ministers decide whether to release the funding, part of its £1.4bn contribution to the World Bank's development fund. The UK government says it wants significant progress to be made on enacting reforms to aid conditions agreed last year.

World Bank member states such as India and South Africa have criticised the strong anti-corruption drive instigated by World Bank boss Paul Wolfowitz.

"If we are to reach the poor, we must find ways of providing support for development in challenging environments," South African Finance Minister Trevor Manuel told the World Bank's Development Committee. "The Bank's new enhanced framework on governance and anti-corruption should not compromise the Bank's core mission of poverty reduction."

We like corruption

2006-09-17T04:29:00.000-07:00

The South African regime is also unhappy with the World Bank president’s stance on corruption.

SOUTH Africa has joined a chorus of opposition at the annual meeting of the World Bank to new president Paul Wolfowitz’s campaign against corruption in developing countries.

SA Deputy Minister of Finance Jabu Moleketi said in an interview in Singapore that while the World Bank could not condone corruption, it should keep its focus on the primary goal of promoting development.

The World Bank, which is the development arm of the International Monetary Fund (IMF), should work with vulnerable governments to ensure aid was well spent and directed towards appropriate projects, he said.

The World Bank Institute’s global governance monitor gives SA a ranking of 382 out of 600 on six governance indicators, ranging from accountability to corruption control. Zimbabwe ranked third-last ahead of Somalia and Iraq, with a score of 29. The US scored 507 and Britain edged up to 528. Nordic countries were top with near-perfect scores.

Wolfowitz has made the fight against corruption a priority of his administration, charging that abuse of public and aid funds is a crucial obstacle to democracy and the fight against poverty. But he has come under fire from aid agencies and European governments who feel he is being too harsh and could be slowing the development of democracy and good governance.

Wolfowitz said: “We can’t tolerate the misuse of our funds. If lending is going in a place where it’s not going to the poor, [then] there are honest officials and honest governments ... and they need more money. We want to make sure it’s going there.”

Moleketi said the controversy was discussed at the meeting of Commonwealth finance ministers in Sri Lanka at the weekend. “The bank is about development and assisting countries in terms of development. It is a bank of infrastructure and that ought to be its mandate.

“The focus on governance and corruption must not take the focus away from what the bank ought to be doing. That is where the anxieties are — that current agendas seem to undermine the key role of the bank in terms of development,” he said.

African finance ministers need to learn from last year’s failed bid to transform the United Nations as they prepare for reform talks at this week’s IMF meeting in Singapore, Moleketi said. If Africans put principle before pragmatism, they risk walking away from the IMF reform process empty handed, he said.

“I hope that, whatever we do, we won’t undermine the prospects for the African continent; that in this case we will develop a consensus. These are very significant institutions and it is important for us, in our position, to gain the sympathy of critical players,” he said.

Finance Minister Trevor Manuel said before he left South Africa for the Singapore meetings that reform would be a priority. He said his agenda would be ambitious but necessary. SA is backing the US argument that European influence should be reassessed following the introduction of the euro.

Throwing out the baby with the bath water

2006-09-15T02:26:00.000-07:00

The long mooted and much opposed mining royalties bill in South Africa is now under attack by the very mining sector the government has striven to create, the mainly black, small-scale mining companies, which say they will be hard-hit.

First mooted in 2003, a new draft of the bill was due in July, but has not yet been unveiled. Significantly, however, it is now not only large mining companies that are against the government’s insistence that royalties will be levied on gross revenues. At a mining conference in Johannesburg this week, Bridgette Radebe, president of the S A Mining Development Association, which represents small mining companies, came out strongly against a revenue based royalties model.

This could be good news for the mining industry in general as the government will not be keen to alienate mainly black, small scale miners who would be harshly affected by revenue based royalties. In its initial recommendations, the government mooted revenue based royalties ranging from 1% for oil drilled in deep offshore waters, to 3% for gold, 4% for platinum and a sizeable 8% for diamonds.

Mining companies across the spectrum have urged the government to base royalties on profits rather than sales, but Finance Minister Trevor Manuel has been adamant that a revenue based law will be introduced. He has, however, hinted that the initial royalty plans might be amended to account for the mining industry’s concerns.

Among the concerns raised by Radebe on behalf of small scale miners is that it will discourage development with miners having to pay levies even when they may not be profitable. It will also badly affect marginal mining operations.

The government had opted for private consultations rather than releasing a new draft bill for public discussion. It is not known when the amended draft will be available for scrutiny before it becomes law.

Meanwhile, despite the drawn out process of getting a new draft into the public domain and before parliament to approve, it is still likely that the bill’s provisions will apply from 2009, a date that has been announced by the finance ministry.

Whiter than white: washing powder or economic policy?

2006-09-07T08:08:00.000-07:00

Things are just not working out in the news South Africa...

Journalist John Pilger is scathing in his criticism of the "whiter than white" economic policies of the South African government, which he says have enriched a few blacks at the expense of millions of others. In his new book Freedom Next Time, the combative Australian-born writer says the African National Congress sold its soul to corporate bosses over glasses of single malt whisky.

"It was as if the ANC aspired to be whiter than white in its relations with the rulers of the world," Pilger writes. "Low tariffs would entice foreign imports; low inflation would preside over low wages and high unemployment ... and the rand would be subjected to the vagaries of the market."

Pilger questions the wisdom of running budget deficits lower than those of many developed nations. Even pro-business economists have questioned such fiscal austerity in the face of pressing social needs.

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The government says that wealth cannot be redistributed if it is not generated and that macro-economic stability is needed for growth, which in turn will create jobs and provide a tax base to expand social services. The ANC maintains that it has dramatically increased spending on the poor since it took power in 1994 and that past fiscal restraint means it can now loosen the purse strings.

The harsh reality of life in black townships is that poverty has increased and income disparities have widened since the end of white rule in 1994. Social grants are too small to make much difference and many poor rural children do not qualify because they have no birth certificates.
While the government has been rolling out piped water and electricity to communities that previously lacked them, it has also been cutting off these services when poor households cannot pay for them.

A wealthy black elite has emerged through a process known as Black Economic Empowerment (BEE), an affirmative action programme which the government says is aimed at redressing the imbalances of apartheid. "What this means is the inclusion of a small group of blacks in the country's white corporate masonry ... This co-option has allowed white and foreign capital to fulfil its legal obligations under new corporate charters and, more important, to gain access to the ANC establishment," Pilger writes.

Income disparities among black South Africans are on the rise as a middle class emerges while the poor get left behind, according to an April report by the South African Institute of Race Relations, a respected think-tank. It said that levels of inequality had increased for all races except whites since 1996. The economy shed hundreds of thousands of jobs in the first decade of democracy as it liberalised.

Pilger also faults the government for the slow pace of land redistribution. "Land could have been purchased and reclaimed for small-scale farming by the dispossessed, run in the cooperative spirit of African agriculture," he writes. Given the often poor results of peasant farming on a continent with frequent food shortages, this may not appeal - though Africa's food woes have been exacerbated by a lack of both government support and credit access for small farmers.

The wheels are coming off

2006-09-07T03:32:00.000-07:00

South Africa's consumer-driven economic boom is about to come to a sticky end...

South African central bank governor Tito Mboweni said on Thursday that the only way of dealing with his nation's propensity to spend was to jack up interest rates.

"The only way to deal with conspicuous consumption is by raising interest rates," Mboweni said in a departure from prepared remarks.

The central bank has raised interest rates twice since June by 50 basis points each time, reversing a cycle of unwinding that had taken rates to their lowest levels in over two decades.

Combined with an emerging black middle class, the South African response was to spend.

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07/09/2006

Too much red tape

2006-09-06T12:56:00.000-07:00

South Africa has slipped downwards in the World Bank and International Finance Corporation's Doing Business 2007 report, with co-author of the report, Caralee McLiesh, saying one of the key areas for reform needed in South Africa is the complex tax system.

While positive reforms were registered in the reduction of the property transfer rate to 8% from 10% of property values, and there was a reduction in corporate tax rates and stamp duties, she said the complex tax system is still a key stumbling block.

"There are not level taxes and there is a lot of administration involved in the tax system. There are many different types of taxes and different government departments involved," she said.

McLeish said South Africa is an example of how a country can slip down the ranking if the pace of reform does not improve and if the reforms undertaken are also not deep enough.

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The Trevor Manuel breathalyser challenge

2006-09-05T15:08:00.000-07:00

Claims of racism and hate speech flew thick and fast on Tuesday when the national assembly debated the multimillion-rand private house being built by President Thabo Mbeki and his wife, Zanele.

"This is over the top," protested DA whip Mike Ellis in an unsuccessful bid to have deputy speaker Gwen Mahlangu uphold a point of order.

"This is hate speech, this is racism, everything all at once."

At one point during the rowdy debate Finance Minister Trevor Manuel challenged Ellis to take a breathalyser test.

Ellis accepted the challenge, urging Manuel to come with him. The two men both left their seats, and were about to leave the chamber when Mahlangu ordered Manuel to sit down.

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Govt told BEE not progressing quickly enough

2006-09-05T13:44:00.000-07:00

The South African government has been told that progress has been very slow in achieving black economic empowerment (BEE) in South African business, with government itself contributing little in terms of procurement from black business.

This emerged in a meeting between President Thabo Mbeki and his economic cluster ministers on Tuesday, including Minister of Trade and Industry Mandisi Mpahlwa, Minister of Finance Trevor Manuel and members of the presidential black business working group.

The two parties met at Tuynhuys, the presidential office, to discuss a variety of issues including the Accelerated and Shared Growth Initiative of South Africa (AsgiSA), ways of fostering financing for black business and progress in BEE in general.

At a media conference, a member of the black business group, Loyiso Mbabane, who heads the business and enterprise school at the University of Fort Hare in the Eastern Cape -- and who carried out a survey on the progress of black empowerment in November last year -- said that the private-sector spend on procurement from black companies is only 3% and "a worrying sign [is] that government is not spending that much either" -- about 10% of procurement spend.

His survey of the top 200 companies listed on the JSE Securities Exchange found that only 27 have 25% black ownership and only five of them have 50% or 50%-plus ownership. This translates into just 1,2% black ownership as a percentage of the JSE's total market capitalisation. The rest is in white hands.

The chair of the working group, AMB Capital's Peter Vundla, said the group impressed on government that there is a need for a more reformist target of BEE. They want targets to be revised more frequently.

In a statement released by the Presidency, it said government is committed to completing a study on the state of BEE on the basis of which a comprehensive discussion between the government, black business and other sectors will take place. A joint task team will be set up to organise the meeting before the end of the year.

Mpahlwa told the media briefing that government is studying the reduction of the complexity of black economic codes, "the totality of things that you have to measure to get a picture [of empowerment success]". He is certain that the number of indicators will be substantially reduced. His department is to put a report to Cabinet shortly, he said.

He said on the employment-equity issue that there had been 13 indicators to measure, but these have been reduced to three. He also pledged to improve government's payment system to small business to assist cash-flow concerns.

In the statement, the Presidency reported that Minister of Safety and Security Charles Nqakula briefed the meeting on the crime situation in South Africa and noted that crime had been declining steadily since 1994.

Other members of the 24-member business working group were Mpho Nkeli from Alexander Forbes and Siemen's Bheki Khumalo, who is a former spokesperson in the Presidency.