The town of Harrismith gets a reprieve for now

Written by Ciaran Ryan. Posted in Uncategorized

This story first appeared in Noseweek.














SA National Roads Agency’s (Sanral) determination to push through proposals to build the controversial De Beers Pass Route, which will shave just 14kms of the existing route at a cost of close to R10bn, was slapped down by the Department of Environmental Affairs in June this year. The route preferred by Sanral would by-pass the Free State town of Harrismith and put thousands of people out of work as dozens of businesses currently dependent on traffic passing between Gauteng and Kwazulu-Natal would close down.

Those who have been following Sanral’s apparent obsession with building the De Beers Pass Route (DBPR) have long suspected a deeper agenda. The concession to operate the current route between Cedara, near Durban, and Heidelberg in Gauteng, expires in 13 years. No business generating R400bn over the 30 year life of the project is going to just turn off the lights in 2029 and hand back the road to Sanral, as required in terms of the original concession contract signed in 1999.

To keep the party going, the concessionaires need the new by-pass route. That will allow the N3 Toll Concession (N3TC), which manages the route and collects tolls between Cedara and Heidelberg, to get a 30 year extension on the business and no doubt create a revolving door for Sanral suits once they exit the public sector. Sanral CEO Nazir Alli, who was supposed to have retired months ago, seems unable to vacate his seat until the e-tolls mess he helped create is brought to some kind of resolution.

Nothing seems to be going right for Alli, whose plans to build toll roads from the Cape to Kwazulu-Natal and beyond face opposition at every turn. Last year the Cape High Court threw out Sanral’s plan to introduce urban tolling on the N1 and N2 Cape Winelands route, citing the lack of a document trail within the organisation’s decision to build the proposed route. Equally mired in controversy is the proposed Wild Coast toll road, which local community members argue will ruin a fragile eco-system, and allow Australian mining group MRC to extract titanium sands in the area, further despoiling the area. The recent murder of Sikhosiphi ‘Bazooka’ Rhadebe, chairman of the Amadiba Crisis Committee, which had been fighting to keep mining out of the area, inflamed an already incendiary community.

Now it is the turn of Harrismith to feel Nazir Alli’s love. Contrary to the cheerleaders for the proposed new route who implausibly suggested the loss of just a handful of jobs, an economic impact assessment by Mike Schussler of reckons Harrismith stands to lose R890m and more than 1,600 jobs, both direct and indirect, if the DBPR goes ahead.

But with just 13 years to go on the existing N3 concession, there is little time to waste for the N3TC. Especially now that the initial capital cost of building the N3 route has likely been fully amortised, so revenues (after deducting a small percentage for road maintenance, operational costs and payments to Sanral) go pretty much to the bottom line. By some estimates, revenue from the N3 route is R2bn to R4bn a year, though N3TC is understandably reticent about disclosing this information. Allowing for inflation and increased traffic volumes, this concession is valued at R400bn over the next 30 years.

The Department of Environmental Affairs’ rejection of the Environmental Impact Assessment (EIA) for the proposed route puts a crowbar in the works. The most cost-effective and logical solution is a simple upgrade of the existing route, which would likely cost around half the R11bn for the solution proposed by Sanral.

Those who have watched Sanral squirm over its e-tolls boondoggle in Gauteng, which the Organisation Undoing Tax Abuse (Outa) reckons cost an average 321% more than similar roads elsewhere in the world, are now starting to discern a pattern in the way Sanral conducts business. Why, for example, did the 1999 N3 Toll Road Concession contract include a requirement for the De Beers Pass Route, if not to bequeath new life to a 30 year concession whose end is nigh? And why should the concessionaires get the benefit of a route that is now fully paid up once the contract expires in 2029. The route should be returned to Sanral and tolls scaled down to cover maintenance only, or at a modest level to fund other essential routes, such as the Gauteng Freeway Improvement Project.

In any event, it’s back to the drawing board for Cave Klapwijk and Associates (CVA), the firm contracted to prepare the scoping report for the DBPR, which has now been kiboshed by the Department of Environmental Affairs.

The Department’s rejection of the proposal steers clear of the economic consequences of amputating Harrismith from the N3, and focuses exclusively on environmental issues, such as why a third alternative route (known as A/C) was not considered in detail, and why no assessments were done on ecological, wetland, air quality, avifauna, visual, noise and the economic impacts of the third route. CVA recommended approval for the DBPR even though the “ecological, wetland, avifauna, heritage, visual, noise and the environmental economics resource specialists are not in support of the above alternative route…” says the Department in a letter to CVA. Among numerous technical points raised by the Department for its rejection of the EIA is the claim that the Platberg Private Nature Reserve is not a declared nature reserve – which it is.

As reported in Noseweek (August 2015), Mary-Jane Morris of Morris Environmental & Groundwater Alliances, responded to the environmental study on the proposed route as follows: “In environmental terms we talk about irreversible impacts. From an ecological point of view, this bypass has several negative irreversible impacts”.

Once a wetland is damaged or affected in a way that alters its natural functioning, it cannot be restored to its pre-existing state. The DBPR runs right through a crucial wetland area, and the only way to prevent ecological damage is not to build the route. “The ecological changes that will result from building the road are forever,” said Morris.

Cave Klapwijk and Associates (CVA) drafted the scoping report for the N3TC and came up with three potential routes:

  • De Beers Pass Route (DBPR), which would branch off from the existing N3 north of the Tugela Toll Plaza, pass through a 500m tunnel before crossing the Wilge, Meul and Cornelius Rivers to rejoin the existing N3 just north of Warden – a distance of 97,7kms.
  • Alternative A, running parallel to the existing N3 Van Reenen’s pass for a short distance, passing the escarpment just south of the Van Reenen’s village, through the Swinburne area, but by-passing Harrismith to then follow the existing N3 to Warden, a distance of 107kms.
  • Alternative B runs from Tugela Toll Plaza to Van Reenen Village interchange, before crossing a wetland in a north-westerly direction to join the DBPR at the Lincoln interchange, a distance of 98,3kms.


The Department of Environmental Affairs asks CVA to rectify the shortcomings in its rejection letter and resubmit its report. This leaves the door open for N3TC to make a second lunge at the DBPR, but opposition is likely to grow rather than diminish.

In a report for the Harrismith Chamber of Commerce, Mike Schussler of points out that the new route is only needed once traffic volumes at Van Reenen’s Pass reach an average of 13,900 vehicles a day, against 2103 volumes of 11,884. The N3 is still several years away from reaching the point where the DBPR or an alternative route with more capacity would be   required, according to Bernal Floor, the veteran transport economist commissioned by the Harrismith Business Forum to side-check the Techworld Consulting Engineers report which recommended proceeding with the DBPR.

“The expected traffic growth at a rate of 5% a year from 2016 to 2043 for heavy vehicles travelling on the route between Warden and Keeversfontein is contrary to experience, as cycles in the national economy will surely result in periods of lower growth,” says Floor. In fact, traffic is presently  declining..

Floor adds that the Department of Environmental Affairs is doing its job in rejecting the N3TC’s proposed new route. “It rejected the proposal on procedural grounds, and haven’t yet taken all the factors into account, but it’s clear they are listening to the objectors.

“There is a  motive in  this rush to get the DBPR approved: why are SANRAL and the N3TC so against upgrading the existing route, and  pursuing the  DBPR when they were told by their own consultants that it will  create excessive  capacity  and waste resources?.”

Floor’s report  criticises Techworld on multiple counts: its claim that the various proposed routes were identified in response to pressure groups “such as the residents of Harrismith” (when Alli and his team were booed out of the town on a visit last year to drum up support); the lack of a sensitivity analysis to assess the costs and benefits of implementing the various route suggestions; and the fact that costs were left out of the analysis, which, if included, could render the project non-viable.

It’s clear from the wording of the rejection letter that the Department is leaning towards to a compromise in the form of an alternative route that would replace Van Reenen’s Pass, but in a way that does not kill the town of Harrismith, and allows the road to be upgraded in stages. This would be less costly from an environmental and economic standpoint than the alternatives currently being proposed.

Also unclear is how the proposed route is to be funded. N3TC are reported to have said they would fund it with a mix of equity and loan funding, which will likely be borrowed overseas. If SA’s credit rating is downgraded, increased interest rate costs may render the project non-viable.

A congenial arrangement

The congeniality between Sanral, the tolling companies and the big construction firms who fixed prices and charged more than three times the going rate for the Gauteng Freeway Improvement Project, is now the stuff of legend. In May, Sanral announced it was claiming R760m from seven construction firms which had admitted colluding on tenders relating to various road projects, but this is a pittance when compared with the R10,8bn over-payment for the Gauteng Freeway project that the Organisation Undoing Tax Abuse (Outa) reckons

Old Mutual and Australian investment bank Macquarie own two investment funds with shares in all three concession operators: Bakwena (operating the N1 Tshwane to Bela-Bela, N1 Tshwane to Rustenburg, and N4 Rustenburg to Botswana), Trac (which operates the N4 from Pretoria to Mozambique) and the N3TC (Gauteng to Durban). Several construction firms are also shareholders in the tolling companies. This poses obvious conflicts of public interest where construction firms are awarded contracts for maintenance on roads where they are also receiving tolling income.

Under pressure from bond investors, Sanral has started issuing summons to non-compliant e-tolls users to recover debts. Sanral’s nemesis, the Organisation Undoing Tax Abuse (Outa), has promised to defend its members against any legal threat and has briefed Gilbert Marcus SC to argue its case in court – which will likely drag out for years. So long as the cases are snaking their way through the courts, Sanral’s revenue remains under pressure and Gauteng motorists who decided long ago to give e-tolls a miss are unlikely to change their minds now.

There is no easy way out of this mess for Sanral, or Alli, who despite plans to retire, is hostage to the crisis he authored. Toll roads have become the touchstone for popular protest across the country.

State-owned enterprises drag SA to the brink of junk

Written by Ciaran Ryan. Posted in Journalism

This story first appeared in Finweek.



SA’s persistently weak growth and the stench of failure in its state-owned enterprises (SOEs) has dragged the country to the brink of junk status.

Last week Moody’s issued a credit note warning that a credit downgrade was on the cards unless government embraced reforms needed to put the country back on the growth path, and placed five SOEs on downgrade watch. Moody’s warning merely restates facts already on the ground: bond investors are increasingly steering clear of SOEs such as SA National Roads Agency (Sanral), Eskom and Transnet. In other words, a downgrade is already priced into SOE credit instruments.

In June, Fitch and S&P held their SA credit ratings at BBB-, just a notch above junk. Bond yields started to strengthen in the belief that SA had perhaps dodged a downgrade to junk. But with the relentless news drip-feed of dodgy tenders at several SOEs, including Eskom, South African Airways (SAA) and Passenger Rail Agency of SA (Prasa), and the Hawks’ campaign against Gordhan over alleged irregularities while he was head of SA Revenue Services, the whiff of downgrade would not go away.

Also in June, Moody’s said it was concerned over tensions between finance minister Pravin Gordhan and other elements in government, which “raised questions about the commitment of the government to sustained fiscal consolidation and prudent governance of state-owned enterprises.”

The whiff of downgrade would not go away. Moody’s cut its SA growth forecast for 2016 from 0,5% to 0.2%, projecting a tepid recovery to 1.1% in 2017. It placed five SOEs on review for downgrade – Eskom, Sanral, the Land Bank, Industrial Development Corporation (IDC) and Development Bank of SA (DBSA). Adding a glimmer of hope, Moody’s added that reform of the labour market and SOEs might change this outlook.

President Jacob Zuma appeared on the same platform as Gordhan, as if to reassure investors that all was well between the two. Zuma also announced the formation of a high-level council charged with overseeing the troubled SOEs and restoring them to health.

“Far from being positive for the nation, some see this as Zuma’s attempt to exercise greater control over these SOEs than Treasury might normally have over the heads of these lucrative entities that hold large sway in the direction and appointment of many capital expenditure projects and tenders,” says Wayne Duvenage, chairman at Organisation Undoing Tax Abuse (Outa).

Last month Futuregrowth Asset Management, a subsidiary of Old Mutual, announced it would halt any further investment in some of the larger SOEs “without having deeper sight of, and comfort around, their governance, decision-making and independence.”

This was quickly followed by a similar decision by Denmark’s Jyske Bank, which said it would cease lending to Eskom, citing concerns over governance. The trickle became a flood: Aluwani Capital Partners and Abax Investmensts, based in Cape Town, were both reported to have soft-peddled on investing in SOEs due to perceived political and economic risks.  SA-based fund managers such as Aeon Investment Management and Sasfin Asset Management came out in support of Futuregrowth. Other investors have been less vocal, but are also understood to have made similar calls.

Following the Moody’s announcement, Anglogold Ashanti chairman Sipho Pityana couldn’t stomach it anymore and called for President Jacob Zuma to stand down before it is too late. “Zuma made commitments to the international investor community earlier this year to stabilise SOEs and to project policy certainty. He has failed to do this, and in fact maintains that there is nothing wrong with our SOEs or with policy direction.

“We can now see the consequences. Because of Zuma, SA is now one step closer to a sovereign downgrade, which will have disastrous implications; already, Eskom faces the prospect of having to pay higher interest on new debt, which means further electricity price increases,” said Pityana in a statement.

What has alarmed bond investors is the ongoing tussle between finance minister Pravin Gordhan and the Hawks, who want to question him over alleged irregularities while he has head of SA Revenue Services. Gordhan has so far refused to cooperate with the Hawks, a move broadly supported by business and opposition leaders, who see this as an attempt by elements within the ANC to unseat a highly respected finance minister who is investigating irregularities at SAA, Eskom and arms manufacturer, Denel, all of which are mired in suspicions of corruption and governance lapses.

Gordhan seems to be prevailing. He replaced the board at SAA earlier this month as part of a wide-ranging plan to restore the company to health and ensure corporate governance guidelines are followed. He made this a precondition for the release of R5bn in guarantees that allows SAA to continue operating as a going concern. This also allowed it to finalise its long-overdue financial statements.

Moody’s analysis of the SA economy and the state of its SOEs merely gave voice to facts already on the ground. Sanral was forced to cancel several bond auctions in the last year due to lack of interest. There were 11 bidders in 2014 when investors still held out hope that Sanral would persuade delinquent Gauteng motorists to support its e-tolls plan. But by May this year the number of bidders for its bonds had fallen to two.

The ratings agency warned that SA faced a downgrade unless there was a recovery in growth, and wants to see fundamental structural reforms.

In a statement explaining its decision to put Sanral on downgrade watch, Moody’s says public resistance to open road tolling remains strong, as measured by monthly average decline in e-tolls collections from the R86m in the 2015 financial year to R76m in 2016. This is well below revenues needed to entice investors to support its bond issues. According to research by the Organisation Undoing Tax Abuse (Outa), nine out of 10 Gauteng motorists do not pay e-tolls. The only way out of this mess for Sanral is to bring legal action against defaulters, but even this is unlikely to have the desired effect.

“While Sanral issued summonses to defaulting road users some are preparing to defend their cases in court further delaying debt collection. Therefore Moody’s expects Sanral’s cash flow pressures to persist in 2017,” says the ratings agency.

Sanral has served more than 6,000 summonses to motorists for non-payment of e-tolls, but this legal battle may take years to resolve, which means its e-tolls revenue is unlikely to improve any time soon.

For Futuregrowth, the harbinger of bad news for SOEs, retribution was swift and severe. It later issued a statement regretting the fact that it had not engaged with SOEs prior to making its announcement, but its decision not to invest in these companies would not change. Yields on SOE bonds spiked following the Futuregrowth announcement, effectively raising their costs of borrowing.

Investors are concerned that Eskom’s debt will overwhelm its liquidity. In March the North Gauteng High Court ordered the National Energy Regulator of South Africa (Nersa), which approves electricity tariff adjustments, to review its latest tariff increase. “Notwithstanding an ongoing appeal process, future tariffs might be affected, which could in turn further exacerbate the funding needs of Eskom against a backdrop of rising costs, notably due to the ongoing growth in power purchase agreements with independent power producers, and a very significant capex programme to upgrade and expand the country’s electricity infrastructure,” said Moody’s last week.

Eskom is able to raise debt on the back of a R350bn Guarantee Framework Agreement with government, but this guarantee may be stretched to capacity as tariff increases become more difficult to implement and the power producer’s capex programme moves into its next phase. Governance is another concern to Moody’s, particularly the ongoing investigation by National Treasury into coal contracts, notably to Tegeta Exploration, majority owned by the Gupta family and President Zuma’s son, Duduzane. Eskom awarded the contract in 2015 and then extended it this year, awarding Tegeta an up-front payment of R586m. amaBhungane reported earlier this month that National Treasury had blocked a further R855m extension of this contract, and has asked Eskom for details on its coal contracts. Had the latest coal contract been extended, Tegeta would hgave received R1.7bn without open tender.

Duvenage says many SOEs have changed accounting policies to boost asset values. “While this in itself is not unfounded by International Financial Reporting Standards (IFRS) standards, it could be frowned upon when applied by SOEs that should not be treating their citizens’ assets at trading tools with which to improve balance sheet ratios. This allows them to further borrow at relatively high interest rates, and spend on capital projects that often run over budget by as much as 300%, and more. Many of these projects which are shrouded in tender irregularities and corrupt activities.”


What the CEOs of state-owned companies earn

The hunt is on for new CEOs at Sanral, Prasa and SAA. The pay is pretty good (see below) but if history is any guide, taking on these posts could be a career-ending move for the new incumbents, who will have to sort through unimaginable financial and governance messes.

Sanral’s 2015 annual report says CEO Nazir Alli earned R4,032m in pay and benefits that year. Alli has been attempting to retire from the company, but has been re-appointed as the hunt for a new CEO continues. We are not surprised, given the e-tolls fiasco the new incumbent will have to sort out. Directors and management remuneration came to R197m in 2015.

Eskom’s chief executive Brian Molefe earned a total package of R9.5m, about R800,000 a month. This does not count shares awarded but not yet vested to Molefe, amounting to several millions of rands more. Directors and executives were paid a total of R75m over the last year, up from R51m the previous year.

Dudu Myeni is listed as receiving directors’ fees of R828,000 in SAA’s 2014 annual report, though this is almost certainly a fraction of her total package. The 2015 annual report is about to be tabled. Former CEO Monwabisi Kalawe is listed as receiving a salary of R3,8m in 2014. Kalawe was charged in May with using forged documents in an attempt to force Dudu Myeni to resign. Kalawe is accused of procuring false overseas bank statements, allegedly to smear Myeni. These were publicised after being handed over to forensic investigator, Paul O’Sullivan. O’Sullivan withdrew the statements and apologised once the forgery became known.

Passenger Rail Agency of SA’s (Prasa) fired CEO, Lucky Montana, was listed in the annual report for 2015 as earning a salary of R5.6m with a performance bonus of close to R2m. His replacement as acting CEO, Nathi Khena, earned R2.6m according to the 2015 annual report. The hunt is on for a permanent CEO, with transport minister Dipuo Peters reportedly at war with Prasa chairman Popo Molefe over the appointment of a suitable successor. It’s a tough job with a high casualty rate. Montana was mired in controversy, having presided over Prasa’s massive fleet renewal programme. According to news reports, 13 locomotives ordered from a Spanish firm at a cost of R600m are the wrong size for our rail infrastructures, and the company failed to adequately hedge its foreign currency exposure, which means it will purchase fewer trains than planned.

Industrial Development Corporation’s CEO Geoffrey Qhena earned a total package of R7,9m according to the IDC’s 2014 annual report. This was made up of emoluments of R3,94m, a performance bonus of R2,9m and retirement and other benefits of R1m.

Development Bank of Southern Africa’s CEO Patrick Dlamini earned a total package of R9.5m in 2015, up from R7.2m 2014. This was made up of a salary of R4.4m, a bonus of R4.45m and other benefits of about R650,000.

According to Land Bank’s annual report for 2015/6, the top earner in the company was chief financial officer Lebogang Serithi with a total package of R4m. Former CEO Phakamani Hadebe earned a performance bonus of R1.8m, while his replacement Tshokolo Petrus Nchocho is listed as earning just R653,000 for the year, though he was only appointed in February 2015.

Denel’s CEO Riaz Saloojee reportedly earned R4.7m for the 2016 financial year and R3.9m the previous year. Saloojee was fired as CEO last year and re-hired fired and re-hired in April this year. According to the Sunday Times, he was bulleted for renegotiating a R455m Nedbank loan for five years to six months, causing a cash crunch at the arms producer. Saloojee also appeared to be at odds with the company’s decision to establish Denel Asia through the acquisition of a company linked to the Gupta family, VR Laser Asia, which National Treasury says was illegal. Denel’s board of directors dispute this, saying it was in conformity with the Public Finance Management Act.


What a downgrade means for SA

Pieter Hugo, head of retail at Prudential Investment Managers, says in the event of a ratings downgrade, investors would demand higher interest rates on SA government bonds to compensate them for the higher risk involved, so the SA government’s cost of borrowing would rise by way of an increasing yield on government bonds. Current bond investors would experience a fall in capital values (to the extent that this hasn’t been priced into the values already).

“Over the medium term, higher borrowing costs would force the government either to raise more revenue via higher taxes or to cut spending in order to avoid widening the budget deficit. Consequently, ordinary South Africans could end up with somewhat lower disposable income, giving them less to save and invest – also also spend, which would then again have a knock-on impact on reducing the growth rate.

“SA government bonds would also be automatically excluded from certain global government bond indices. Such indices have become popular benchmarks for index tracking funds, helping to grow the global demand for SA government bonds. So index-tracking investors and any other investors precluded from investing in non-investment grade assets (like many pension funds) would no longer invest in our bonds, adding further pressure on yields to rise. There would be less foreign (and local) demand for our bonds and money would leave South Africa, causing further rand weakness and ultimately impacting inflation and investors’ pockets,” says Hugo.

The cost of borrowing for state-owned enterprises and private companies would also increase, which would likely dent corporate balance sheets, particularly those of companies that are highly geared or rely on borrowing, like property companies. This would in turn impact negatively on profits and investor dividends, trimming equity returns.

Also in the bond market, fewer corporate bond issues are likely in what is already a much smaller market following the collapse of African Bank. This also would mean fewer higher-yielding investment options for asset managers and reduced liquidity.



The medieval state of SA’s home repossessions industry

Written by Ciaran Ryan. Posted in Journalism

This story first appeared in Moneyweb.














A recent study of home repossessions puts SA among the worst in the world. The enthusiasm with which SA banks rush to repossess homes is described as ‘medieval’ and cruel.

SA might claim to have one of the most liberal constitutions in the world, with supposedly strong legal protections against arbitrary deprivation of property, but tell that to the more than 5 000 people booted from their homes each year by the banks, and the 15 000 served with sale in execution notices, which is a prelude to sale at auction by the sheriffs.

Some years the figures are much higher. A recent study of home repossessions in SA by Advocate Douglas Shaw suggests 1% of the 1.8 million mortgages in the country are summonsed by the banks each year after falling into default. This figure is much higher than most other countries, including other developing countries.

SA’s rate of repossession on a per capita basis is four times higher than the average for the rest of the world and a shocking 20 times worse than counties employing best practice such as Denmark and Singapore. “This appears to clash with our South African Constitutional ethos of human rights encapsulated in our Constitution. With these aspirations South Africa would surely aspire to having one of the lowest rates in the world, not one that is even average,” says Shaw in a doctoral thesis entitled The Legality of the Law of Sale in Execution for Substantially less than Market Value in South Africa.

Shaw estimates that properties worth R5 billion are sold each year in SA at an average discount of 40% to fair market value. This means that “in the last 20 years since the Constitution came into effect, about R400 billion worth of damage has been done by sales in execution to the people of SA.”

This is because High Court rules specifically preclude the setting of a reserve price at auction. The same rules prevent estate agents from selling these properties. This opens the door to bid rigging by syndicates, who routinely pick up properties for a fraction of their market worth – in some cases for as little as R100.

Each day, the courts are crowded with lawyers representing the banks, attempting to obtain judgment against defaulting clients before proceeding to sell their properties at auction. Shaw’s study suggests SA’s medieval home repossessions practices are an affront to the Constitution and among the worst – if not the worst – in the world. To get a sense of this, you have to go to social media, where a growing network of angry, dispossessed South Africans vent their bile over supposedly corrupt judges and lawyers. One such network was People Against Lawyers and Liquidators, set up by Jonn Basson of Pretoria. Basson died of a heart attack last year when the sheriff came to evict him from his farm. The liquidators continuing to tally up his assets while his body was rushed to the hospital. Ironically, Basson had appealed the eviction order, which should have protected him against eviction.

A common complaint is that lawyers are in the pockets of the banks, or if they’re not, they soon will be. They charge outrageous fees and then drop their clients at the steps of the High Court, having suddenly found a better paying client in the form of the banks.

“What SA needs are new rules that are less damaging to the rights of those who are losing their homes,” says Shaw. “Calling our current laws medieval is actually unfair to the medievals. In Roman Dutch common law history, the judge had to confirm that the sale was for a fair price before it would go through. Medieval laws were actually considerably better than the dreadfully draconian system that prevails in SA today.”

Other countries require banks to sell repossessed homes at fair market value or, if no sale has occurred within a reasonable time frame, at marginally lower prices. Many countries require estate agents to be involved in the sale. Others, such as the UK, require banks to reschedule debts to allow defaulting customers to get back on their feet and remain in their houses.

Home repossessions affects South Africans of different races and income levels.

The Constitutional Court in Jaftha v Schoeman declared that banks should only sell at auction as a last resort and should find more creative ways to sell repossessed properties. Banks swear blind they are using the auction process as a last resort, though the evidence suggests otherwise.

Shaw’s study investigated alternative mechanisms in other countries, such as court orders to reschedule the debt (as is common in England), the sale of a house with a gradually decreasing price commencing with the market price (either through an estate agent or a series of auctions) and having reserve prices to reflect this. Such schemes are in place in other developing countries like Malaysia and South Korea.

The study examines the social costs of home repossessions: the indignity of eviction; the upheaval of families having to move, often into less desirable accommodation; children having to change schools; and the compounding effect of losing a home as well as a job.

“There is the further problem of actual death and serious illness caused by the current practices. Mental illness has been found to increase after repossessions though not evictions from rental properties. Foreclosures have been found in one US study to result in depression, stress-related illnesses and spikes in emergency room visits.”

This study found that a 5% increase in foreclosures in one state was associated with a 25% increase in suicides for people aged 46 to 64.

Home repossessions affects South Africans of every race and income group. A group called Lungelo Lethu Human Rights Foundation is preparing a class action suit against the four major banks for what it says are the unlawful evictions of thousands of South Africans from their homes. It is also calling for:

  • A judicial investigation into these repossessions.
  • Properties sold in execution must be at market value.
  • Insurance must be clearly defined in terms of who bears responsibility for what (both long and short term).
  • Disclosure between the service provider or financial provider and the consumer must be clearly defined, as in the securitisation (or onward selling) of home loans, which is conducted in secrecy and is of questionable legality.
  • Proper township establishment is required to ensure services are rendered to communities. Some townships were never proclaimed by the Surveyor General, allowing Eskom and oil lines to traverse residential areas, and sewage to escape into rivers.
  • Consumer education is woefully inadequate and banks have been able to take advantage of financial illiterate customers. This has to be changed.
  • The various ombuds are neglecting their duty to protect the poor against abusive conduct in the financial sector.


Did Standard Bank lie and cheat to get its hands on computer programme?

Written by Ciaran Ryan. Posted in Journalism

This story first appeared in Noseweek


Did Standard Bank lie and cheat to steal an idea worth billions? When atm and internet fraud started seeping into public consciousness in the 1990s, Joburg-based software development company Advertising Digital Services (ADS) came up with a novel solution to a growing problem: hackers had found a way to secretly install a program on computers that would record keystrokes and mouse-clicks when users were logging on to sensitive websites. With this information, they could empty a bank account from anywhere in the world. ADS’s solution was to remove the keyboard as a point of entry to the computer and replace it with an on-screen virtual pin-pad that, each time it was used to input a password or PIN number, would rearrange the digits on its virtual keyboard. ADS director Johan Reynders wanted to patent the system, but was advised against it because, in any event, the system was protected by copyright for 50 years.

To avoid any ambiguity about ownership, however, he uploaded it to the internet in the 1990s so that people around the world could download it free, but only with his permission and provided they acknowledged that the intellectual property rights remained with ADS. Importantly, he says, he chose not to provide any information on the uses and applications of the product so as to prevent software developers coming up with rip-offs. He knew the industry had not yet woken up to the threats from hackers. When it did, he planned to introduce his solution to potential clients.

By 2001 it was clear that others were ripping off ADS’s intellectual property in breach of the user agreements, so Reynders updated the software licensing agreement to levy a penalty of $10,000 per machine using the random keypad without a certificate of authenticity. Legitimate users were charged a discounted rate of $250.

In early 2003, Reynders reckoned the time was ripe to introduce his solution to the market, and he approached all the local banks. All of them declined to meet with him, claiming they had no problems with internet security. But within months the national press was awash with stories of rampant internet banking fraud, prompting the Banking Council of South Africa to issue a public warning in July that year.

johan-reyndersIn the early days of August, Reynders (pictured) received a call from Louis Lehmann, head of Standard Bank’s IT security, requesting a meeting, as the bank wanted to find out exactly how the ADS system worked and how its software would eliminate the threats highlighted by the Banking Council. Reynders was happy to tell all, provided Standard Bank signed a non-disclosure and confidentiality agreement.

The meeting took place two weeks later, on 18 August 2003, with no fewer than 15 Standard Bank officials in attendance. They included Lehmann, Janie Basson (then head of Standard Bank Group), Anthony Olivier (senior manager for IT security), Michael Hawthorne (head of IT: personal and business banking), Guy Wigg (legal manager), Richard Seddon (head of online share trading) and Herman Singh (CEO of Beyond Payments at Standard Bank). The weight of the contingent attending left Reynders in no doubt the bank was now seriously interested. Also in attendance, for reasons unknown, were two Investec employees. All willingly signed the non-disclosure agreement (NDA).

Reynders outlined three vulnerabilities in the Standard Bank website, two of which, it transpired, were as yet undiscovered by the bankers. He explained how his software provided three levels of protection against “spyware”.

To his surprise, at the end of the meeting, the Standard Bank attendees, including its chief software engineer Corniel du Plessis, indicated they had no interest in his solution, and dismissed the threats to their internet banking services he had identified as “laughable” and “far-fetched.” They also expressed the view that Reynders’s randomised keypad, with its constantly changing number arrangement, would confuse their clients.

By signing his non-disclosure agreement, Standard Bank acknowledged that the information imparted to them was proprietary to ADS and “valuable, a special secret, and a unique asset”. The agreement further prohibited the bank from disclosing this information to a third party without the written consent of ADS, or from exploiting or using it in any way.

But, barely two months later, when Reynders opened the Sunday Times he was confronted with a report in which Herman Singh, CEO of Beyond Payments (a division of Standard Bank) and one of those who had been present at the meeting, bloviated about the threats of online fraud and how Standard Bank had developed a solution to protect clients’ cash. A day later, on 6 October 2003, Singh reported to Standard Bank’s 280,000 internet banking clients that it had just updated its internet security.

Reynders had no doubt the security update that Singh had announced to the bank’s customers was a direct rip-off of his intellectual property, and was therefore a breach of the confidentiality agreement they had signed.

Based on figures from Standard Bank itself, 500,000 internet transactions were recorded each day – a staggering 730 million over the four years the bank proceeded to use this particular security solution. Reynders reckons the bank owes him at least US$10 billion (R153bn) in damages.

Standard Bank discontinued use of the security system in 2007, coincidentally, just after Reynders deposited R200,000 into the bank’s attorney’s trust account as security for legal costs, as demanded by the bank as a precondition for the court hearing of his damages claim to proceed. He had no doubt this was done to mitigate any damages the court might in due course have seen fit to award him.

How Reynders comes to the $10bn damages figure is by a straightforward application of penalties outlined in his published user licence agreement. That is, $10,000 for every breach, multiplied by the estimated one million Standard Bank clients who used the system. To put this in perspective, Reynders’s claim is a shade less than the bank’s entire market capitalisation of about R180bn, and more than seven times last year’s reported profit of R23.8bn. This does not include Standard Bank users outside South Africa, nor use by associates such as Investec, Bank of China and Bank of India.

The problem Reynders faced was how to enforce his rights against a bank with deep pockets and a squad of highly paid legal counsel at its disposal. He attempted to negotiate a settlement with the bank over the next two years, but this went precisely nowhere. He managed to track down a firm of attorneys willing to take on the case – a rarity in South Africa, as anyone with a gripe against the banks knows – and on 25 July 2005 they served summons on Standard Bank, claiming breach of confidentiality and “re-creation and exploitation” of ADS’s intellectual property.

In its reply to the summons, Standard claimed that its chief software engineer, Corneil du Plessis (who had attended the meeting with Reynders, and had been particularly dismissive of the online threats and the type of technology proposed by Reynders) had coded algorithms on his computer that proved the bank was already working on a solution similar to that of ADS as early as 23 July 2003 – three weeks before Reynders disclosed his secrets to the bank. (But as it happens, at about the time the bank had called him seeking a meeting to be briefed on his scheme.) Which immediately raised the question: if the bank’s own staff were already on top of the problem with an identical solution, why invite Reynders under false pretences to such a high-level meeting where he is persuaded to reveal all the detail of his scheme to the bankers, on a supposedly confidential basis? And after which he is told they see no merit in it. Why the outright lie?

That deception was their intention is further confirmed by the fact that at their meeting on 18 August 2003 they made no mention to him of their own attempts, that had commenced just three weeks earlier, to develop such a system.

In response to Standard Bank’s plea of having had their own prior scheme that just happened to be almost identical to his, Reynders demanded proof that Standard Bank had beaten him to the punch.

Two forensic audits were commissioned, one independent, the other by the bank, to examine the computer hard drive of Corneil du Plessis, the Standard Bank man who, quite fortuitously, is said to have developed, independently, a very similar system. The first was conducted by Mervin Pearce of Security Audit and Control Solutions, the second, by Dr Fritz Solms, an IT expert commissioned by the bank. Both experts concluded independently that there was no evidence on Du Plessis’s hard drive to support the bank’s plea that he had developed the security software prior to the meeting with Reynders on 18 August 2003. What they did find on the hard drive was a stack of pornography and links to illegal websites.

Mervin Pearce of Security and Audit Control Solutions, in a forensic report drafted in September 2006, states the following after an inspection of the Standard Bank’s computer hard drive used for the program in question:

“The statement made by Corneil du Plessis (Standard Bank’s IT expert) that the scrambling code was developed on or before the 23rd July 2003 is incorrect as the initial book-out by Corneil du Plessis of the common pinpad.jsf (not the scrambling software code) was on Wednesday the 30th of June 2003 at 11:05:05 in the morning. This is one week after the alleged meeting where internet security was discussed…

“The evidence on the hard disk drive indicates that the first occurrence of the scrambling for the Pinpad is on 3rd of October 2003.”

In other words, the evidence suggests Du Plessis only started to work on the source code for the scrambled keypad after the meeting with Reynders on 18 August 2003.

Pearce goes on: “The critical analysis of Corneil’s contemporaneous statement [about] when the development of the scrambling code took place on the hard disk is negated by the evidence found on the hard disk drive and the physical audit trail.”

In summary, the forensic auditor found evidence that Standard Bank’s programmers had been working on a type of screen keypad as early 23 July 2003 (three weeks prior to their meeting with Reynders), but the crucial scrambling code was only added in October – after the meeting with Reynders. Pearce concluded that ADS, not Standard Bank, was the proprietary owner of the software.

In his forensic report, Dr Fritz Solms notes that Standard Bank first publicly announced the planned use of a virtual pinpad on 25 July 2003, but the first mention of a scrambled pinpad was made on ITWeb – a prime source of IT news – on 6 October of that year. But, contrary to Pearce’s view, Solms says: “In my opinion the technical implementation of a scrambled pinpad would not have posed a significant challenge to even junior software developers” ; adding that the algorithm for scrambling a sequence of numbers has been around since the 1980s.

This might have been true, had they thought of applying it as a means of further securing online banking transactions. They clearly had not, until Reynders told them about his idea.

Reynders says his case is not about the technical complexity of coding a scrambled keypad. He says his intellectual property relates to how this technology is applied to deal with the problem of online fraud – that is what has been pilfered from him by Standard Bank.

The mysterious Investec letter

A trial date was set down for 14 April 2008. Just a few days prior to this, Standard Bank introduced (“discovered”) a bombshell bit of new evidence – an undated letter on Investec’s letterhead in which two senior officials of that bank claimed that Investec had implemented a technology similar to ADS’s system on its website ten days before the Reynders meeting. The letter was signed by Paul Hanley, head of Investec Private Bank, and Tim Till, that bank’s head of risk.

Reynders believes it to be an outright lie intended to run up legal costs and delay justice – and told everyone so.

Standard Bank stuck to its claim that the Investec letter was authentic, despite ITWeb’s reporting that Investec had uploaded similar technology to that provided by ADS some time after Reynders met with Standard Bank.

The Investec letter was supposed to support Standard Bank’s contention that the technology was widely available prior to the bank’s having signed the non-disclosure agreement with ADS and, if it was a breach of copyright, it was an unintentional breach.

By now, Reynders’s legal team were getting cold feet. His attorney and legal counsel resigned, alleging threats from the bank’s legal team.

The bank’s advocate, Schalk Burger SC, approached Reynders on the day of the trial with an offer to settle, failing which he would ask the court to award costs against ADS. Reynders refused. In front of Judge Roland Sutherland, Reynders represented himself and asked for more time to get to the bottom of the Investec letter and find new legal representation. Judge Sutherland agreed.

Reynders appointed a new firm of attorneys, who pressed Investec on the authenticity of the letter it had provided Standard Bank. Investec simply refused to respond, reinforcing Reynders’s suspicions.

Reynders’s legal team also asked Standard Bank for a copy set of all the documents it would rely on in the upcoming trial, as he feared some of the documents might have gone missing when he changed attorneys.

To his amazement, he found that the duplicate set they supplied contained a copy of an email in which Corneil du Plessis discussed the security threats, that differed significantly from the copy of the same email that the bank had originally made available to him in the “discovery” stage of the case.

The copy of the email now provided by the bank had in the interim clearly been “doctored” by someone who presumed he was no longer in possession of the original. It looked like a crude cut-and-paste of some exculpatory text that would support the bank’s claim that it had had knowledge of the technology prior to its introduction by Reynders.

Reynders had now been given two versions of what purported to be the same email, one clearly a forgery. Why the forgery, other than to mislead the court with false evidence? This, says Reynders, is confirmed by an earlier affidavit, filed by Standard Bank’s Louis Lehmann in 2006 in response to a request for discovery, in which Lehmann stated that the bank had no documentation of whatever nature that would support their plea.

Around this time the bank’s attorney Aslam Moosajee of Deneys Reitz (later Norton Rose) argued that ADS was being deliberately slow in advancing the case, and requested the matter be placed under case management by a judge. The late Judge Mohamed Jajbhay was appointed to hear the matter, which would go to trial on 25 March 2010. If ADS was not ready by then, the case would be dismissed with costs. ADS wanted a postponement as it had not been able to elicit a response from Investec on its supposedly exculpatory letter, a bit of evidence potentially devastating to ADS’s case – if it were true.

ADS’s attorney at the time reported back to Reynders that Judge Jajbhay had “gone off at him” during the pre-trial hearing, and threatened that the bank would be awarded a de bonis propriis cost order (where the loser’s attorney – rather than his client – is ordered to pay all costs of the case), unless he withdrew the case against Standard Bank before it went to trial. Shocked, Reynders contacted Judge Jajhbay and asked why he had made this unseemly threat to his attorney, to which Jajbhay replied his comments were “in jest”. But by then the damage was done: Reynders’s attorneys had panicked and withdrawn from the case.

Judge Jajhbay, struggle stalwart and defender of press freedom in ruling for the Sunday Times when it published unlawfully obtained medical information about the late health minister Manto Tshabalala-Msimang, had interesting ties with Standard Bank and its legal team. Standard Bank was the major sponsor of SA cricket at the time, and Jajbhay served on the sports body’s legal and governance committee. The bank’s attorney, Aslam Moosajee, is the brother of Mohammed Moosajee of SA Cricket fame. Adv AE Bham SC, who represented Standard Bank in this case, also previously provided legal counsel to SA Cricket.

Given these ties, Reynders didn’t like his odds. On 25 March 2010, Reynders was in court again, this time before Judge Tsoka. Again he was unrepresented, and was forced to ask the judge for a postponement as he had still not been able to get to the bottom of the obviously critical Investec letter. Adv Burger made sport of this, claiming Reynders had a pattern of showing up in court without legal counsel. Reynders attempted to point out that his lack of representation was the result of the bank’s bullying tactics. The trial was ordered to go ahead, or be dismissed with costs as per late Judge Jajbhay’s orders.

Just before the trial commenced, Reynders received an email from the bank’s attorneys advising him that they would not be using the contentious Investec letter in court. A reasonable deduction from this was that Investec was not prepared to testify under oath to the truth of its contents or be cross-examined on how they came to introduce the system at their bank.

Standard Bank’s only witness at the trial was Du Plessis, who had already been found to be a liar by both forensic experts. The trial was tainted with irregularities: Du Plessis was allowed to read his testimony from prepared notes, and gave hearsay expert evidence without filing an expert notice, as would be normal in such trials.

Errors of fact

Judge Tsoka dismissed Reynders’s case and found in favour of the bank. He further refused ADS leave to appeal without giving reasons. The judgment contains several errors of fact, hearsay evidence and rulings on points that were not part of the bank’s pleadings. For example, the judge states as fact that Reynders conceded that his software was not secret and was available freely on the internet – which is not what he conceded.

Reynders is now preparing to take his case on appeal to remove what he says are the errors of judgment handed down in the South Gauteng High Court. This time he plans to have some heavyweight legal counsel at his side. “Kenneth Makate won his case against Vodacom in the Concourt, which found he had been cheated out of his invention. According to media reports, Vodacom must pay him R10.5bn. But look what it cost him: sixteen years and R5.5bn in legal costs, which is what his legal funders are expected to receive from his winnings.”

How is that fulfilling the Constitutional right of access to justice?

“It’s been reported that Oscar Pistorius spent R30m on his defence. Imagine you are accused of murder – rightly or wrongly – and you don’t have money. You’d rather run than come up against a justice system which bankrupts you,” says Reynders.

When done with Standard Bank, he wants to press for specific legislation whereby anyone who is party to a legal fraud is criminally charged and jailed. God speed with that.

Residents fight back against banks’ eviction tactics

Written by Ciaran Ryan. Posted in Uncategorized

This article first appeared in Groundup.

A group called Lungelo Lethu Human Rights Foundation is preparing a class action suit against the four major banks for what it says are the unlawful evictions of thousands of South Africans from their homes.

MeetingOnEvictionsMethodistChurch-CiaranRyan-20151202 (1)The group is being led by King Sibiya, who has waged this fight before. “What we are seeing now is no different from the human rights violations that we fought against during the apartheid years. The difference now is we are fighting the banks. And it is not just black people who are victims of the banks, white people are too. This case shows that justice is for the haves, not for the have-nots.”

The Constitution provides protection against arbitrary deprivation of property, but Sibiya says this is routinely flouted by the banks.

Most of the evictees represented by the Foundation are from poor communities in Gauteng. In many cases, they were evicted from properties they had occupied for decades, properties that were acquired during the apartheid years when blacks were denied freehold title. The best they could get was a 30 or 99 year lease from the local municipality, which was the primary landowner in places like Soweto. Banks started lending money to those with leasehold title, and this is where trouble seems to have started. Part of the claim the Foundation is making against the banks is that they were not entitled to loan money to those with leasehold title, since in the event of default the property would revert back to the local authority – effectively nullifying their collateral (being the house). This is part of the legal mess the court is going to have to sift through.

At a meeting of about 40 evictees in Johannesburg’s Central Methodist Church last month, some disturbing stories of abuse were told, such as that of 91-year old Gladys Mviko, who was evicted from her home in Vosloorus in 2012 for reasons she cannot fathom.

Mviko acquired her home in 1988 by way of a 99 year lease, and took out a small loan with the Perm (later acquired by Nedbank) to build an extra few rooms. On 24 November 1998 a judgment was allegedly handed down against her for default on her loan with the bank. This is an impossibility she says, as she was up to date with her payments to the bank. The property was sold at auction on 17 May 2012 for R100 – a ridiculous and suspiciously low price. Mviko says no summons was served on her, and on the basis of this alleged judgment she was evicted from her property – without a court order.

“Who gave the bank permission to sell my house?” she asks. Her loan to the bank was debited every month from her pay cheque, and was not in arrears, she maintains.

She now lives with her daughter, Florence Majola.

Sibiya points over to the Johannesburg High Court building, a half block away from where we are sitting. “Go and look at the court roll in the High Court any day of the week. 80% of the cases in the court are home repossessions and Road Accident Fund cases. And nearly a third of the 80% are default judgments.”

I went over and checked the court roll as he suggested and he was right. By far the majority of cases on this particular day involved the banks against presumably defaulting clients.

Sibiya fought for tenants’ rights in the apartheid years, and was one of the architects of the Mngomezulu versus City Council of Soweto case in 1986 that prevented tenants being evicted from their homes for non-payment of rent on the grounds that the City Council had not followed the law in setting rentals. The case was won on technical rather than human rights points, but it gave black residents greater security of tenure in their homes. While whites enjoyed freehold title over land under apartheid, blacks were regarded as transients who had to make do with leasehold rights.

The stories of eviction range from the tragic to the bizarre. Moses Mgijima (65) now lives in a shack in Thembisa, having been evicted from a municipal house he had acquired under leasehold title in 1982. He says he never borrowed a cent from Nedbank, but was evicted in 2012 when he was informed that his house had been sold by Nedbank to a company going by the name CC Trade 57 cc. He brandishes a letter from Nedbank saying a loan was taken out, but Mgijima says they have the wrong person. “I never had a loan with Nedbank. They show my property in the name of Maria Mbatha (who lives in Thembisa at a similar numbered but different address).”

Josephine Ncanywa also lived in a leasehold property in Dobsonville Ext 2. She borrowed R28,700 from the bank and admits to falling behind on her payments, but I was shown an insurance policy issued by the Perm that it would cover any shortfall payments – which apparently never happened. She says no summons was served on her (a common complaint) and she was evicted in 2005. She complained to the local municipality and was told to re-occupy the house, which she did. She claims she was then evicted a second time in 2008 by Red Stripe Trading 68 cc without a court order – which is illegal. She went to retrieve her court file but it was lost. She now lives in Orange Farm.

Communities are wising up to the home repossession scandal and now come out in force whenever the sheriff arrives with officials to evict tenants. The same tactic is being used in other parts of the world and lawmakers are getting the message. Greece has changed its law to prevent homeowners being evicted from their primary residence.

At the Central Methodist Church in Johannesburg I meet up with Solomon Nhlapo, whose late mother Mary acquired a 99 year lease house in 1965 and in the 1980s borrowed money from the Perm to build extensions. Mary passed away in 1994 but her son Solomon continued paying the bond until 1997 when he figured he had probably paid off the loan amount. He approached the bank and asked for the outstanding balance, only to be told he could not have that information as the account was in his mother’s name. “But my mother is dead and I am the one paying the bond,” he told the counter clerk. He told the bank he must assume the bond was now fully paid up and therefore stopped paying. He then discovered that the house had been sold to a company CUF Properties for R100 at auction. No summons was issued, no eviction order was presented, according to Nhlapo.

CUF has since sold the house to a new owner for R350,000. Nhlapo shows me a letter from the bank showing the bond was paid up and instructing Nedbank’s home loans department to hand over the title deed. Instead, the bank sold the property to CUF.

When I previously investigated a slew of similar complaints in Cosmo City, to the north of Johannesburg, the pattern was the same. No summonses, no eviction orders. All of the evictees were working people, some of whom had lost their jobs and run into cash flow difficulties, with little or no knowledge of the law. It is easy to bamboozle them with official-looking eviction notices. One Cosmo City resident, Victor Zuma, had his home repossessed by FNB over an arrears amount of R6,000. He is now seriously ill, the result he says of the stress of first losing his job, then his house. When contacted for comment, FNB says it tries to give defaulting customers time to catch up on arrears and only engages in the sale in execution process as a last resort – a stock answer whenever this type of question is raised. I asked the same question of the other banks and got pretty much the same answer.

“What they do is the sheriff arrives and if no-one is around he hands the summons to a neighbour,” says Maxwell Dube, publisher of the Cosmo City Chronicle, which has investigated corruption around home repossessions in the area. “Most of the people I have spoken to who have been affected by this did not see their summons before they were evicted.”

One investor had purchased 26 properties in Cosmo City in 18 months, all of them repossessed by Absa. When I tried to contact the investor, he would not take my calls. Later I discovered that he had started transferring the properties out of his name, presumably to cover his tracks.

Another sad case is that of Johannah Tshabalala who, with her late husband Mantae Petrus, acquired a house in Katlehong’s Khumalo section for R39,000, financed by Nedbank. This was fully paid in February 2007. In fact Tshabalala over-paid an extra R1,000. She tried to approach the estate agent who sold her the property for her title deed, but he had since disappeared. In 2010 she received a summons saying the owner of her fully-paid up house is CUF Properties and she had 30 days to vacate. A deed search shows CUF bought the house in 2009 for R69,000. The deeds register shows the house has been sold seven times since. She was evicted in April 2015, but remains a squatter in her own house. She was arrested for trespassing and granted R300 bail – all for a house that she insists is fully paid up.

Though Nedbank features prominently in the cases mentioned above, it is by no means the only bank accused of improper or unlawful behaviour.

When presented with the above information, Nedbank appeared keen to resolve the matter.

– See more at:

How SA slept through the BEE revolution

Written by Ciaran Ryan. Posted in Uncategorized

This article first appeared in Moneyweb.

When the term Black Economic Empowerment (BEE) first floated into the South African business and political lexicon in the early 1990s, there was some hopeful discussion that it would last just 20 years and then be phased out.

Well, 20 years have come and gone, and if anything, BEE has morphed into something more oppressive and outrageous than even the original architects could have imagined.

In the foreward to Anthea Jeffery’s book BEE: Helping or Hurting?BEE Helping or Hurting, author Rian Malan writes that most journalists missed the most important story of the post-apartheid era. “By the time I reached the halfway mark I was trembling with outrage and bombarding friends with distressed SMSes and emails. Are you aware, I said, that the ANC government has drawn up a ‘final policy proposal’ allowing it to expropriate 50 per cent of farmland without compensation being paid to the farmers concerned? And that the Constitutional Court has already given its indirect blessing to such a move?”

South Africans of every colour need to face up to some harsh realities: white South Africans need to admit that they unfairly benefited from apartheid race laws that kept blacks out of the race; black South Africans need to recognise that the laws being drafted by this government in their name have the capacity to destroy our society “just as surely as the Xhosa nation was destroyed by the Great Cattle Killing of 1856 to 1857.”

There’s a whole library of laws on the table that will empower the government to plunder pretty much what it likes: the Expropriation Bill, empowering “thousands of officials at all three tiers of government to expropriate property of virtually any kind”; the Protection of Investment Bill of 2013, which denies foreign investors the right of international arbitration in the event the government decides to seize their assets; the Mining Amendment Bill, which gives the government the right to take control of privately-run oil and gas fields for whatever compensation it likes.

The consequences of BEE and associated laws are slapping us in the face daily, yet we choose not to notice: foreigners are investing in Kenya rather than SA; South African companies are shipping their money abroad as fast as possible. Sweeping amendments to BEE laws are tabled that will accelerate these trends, yet we yawn and pretend it will all come out alright. South Africans are truly sleeping through the revolution, as Malan points out.

Critics of BEE typically point to the handful of politically connected individuals who have been the primary beneficiaries of BEE, leaving the broad mass of South Africans in relative poverty. But there is no doubt the massive expansion of the black middle class (which now outnumbers the white middle class) is a major outcome of these policies. Free Market Foundation economist Loane Sharp argues that the black middle class will double over the next seven years to about 11 million, helping to pull the economy out of the mud.

Far less attention is paid to the costly and disastrous policies and laws that have been passed under the umbrella of BEE. Take Outcomes-Based education, one of the costliest social experiments in the post-apartheid era. The teaching of reading, writing and arithmetic were down-played, and in 2010 The Times reported that five million pupils leaving school were unable to read or write adequately. African drop-out rates at university were 50% according to a 2013 Council on Higher Education report, while just 16% of the 2005 intake completed their three years degrees within the designated time. Pass rates were dropped to make the graduation figures more commodious for the education bureaucrats. All in all, a shockingly poor return for what is one of the biggest expense items in the budget.

This book is not a pleasant read. But to flinch from this touchy subject is fatal, because the technocrats drafting some of the crazy laws that Jeffery dissects have no intention of stopping here. They want to go all the way, wherever that may be. Many of these technocrats are ideologically-driven fellows of the Marxist-Leninist school who harbour a secret admiration for Robert Mugabe. Others are dirigistes who would leave no human endeavour untouched by the supposedly benign hand of government.

Criticising BEE exposes one to charges of racism, if white, or sell-out, if black – which is precisely why so many destructive laws have been allowed to pass in almost total silence.

Most South Africans in the 1990s conceded that it was not enough to simply repeal discriminatory laws, but that remedial action would be needed to overcome the legacy of past discrimination. Hence the Constitution in 1996 was anchored in the concept of non-racialism and equality before the law, with a sub-section authorising the taking of “legislative and other measures designed to protect or advance persons…disadvantaged by unfair discrimination.”

But elements within the ANC were more committed to the national democratic revolution, which they believe exempted them from the Constitution and the negotiated settlement thrashed out between the ANC, its allies and the National Party. Their goal was eliminating property relations and ensuring demographic representivity in every sphere of society.

Who would have thought South Africans entering university would still have to declare their race, nearly 25 years after the Population Registration Act was abolished? The declared intent of the Employment Equity Act is to end racial prejudice, instead it feeds it by entrenching racial consciousness.

The use of racial quotas was always going to be messy, and so it has turned out. Coloureds in the Western Cape (where they account for nearly half the population) have been over-looked for promotion in the Department of Correctional Services because national demographic quotas require Africans to make up the numbers. In Krugersdorp, the SA Police Services promoted a less qualified African male over an Indian woman with 24 years’ experience, until this was overruled by the Labour court. It is left to the courts to wade through the bizarre calculus of racial quotas and make determinations on who gets the job.

Jeffery provides an interesting expose of “inappropriate appointments” made possible by a provision in the Employment Equity Act allowing the appointment of black people with no proven capacity but “the potential to acquire the ability to do the job.” This soon became the favoured loophole behind which kin, friends, and comrades were favoured over more competent applicants. A 2012 report by the state-funded Human Sciences Research Council warned that “the ANC’s deployment strategy systematically places loyalty ahead of merit and even of competence and is therefore a serious obstacle to an efficient public service.”

BEE is great for the connected elite. Mathews Phosa, former national treasurer of the ANC, until recently sat on more than 80 company boards, Cyril Ramaphosa, deputy president of the ANC, sat on more than 50, though said he planned to resign from many of them to concentrate on his political duties.

There is no quarter of the economy that is not skewed by racial profiling and BEE points, quotas and policies. New procurement regulations have been tightened to stop the “fronting” (or “renting of black faces” as Cosatu calls it), but this raises the costs for businesses, and ultimately consumers. BEE equity deals on the JSE in the decade up to 2008 were valued at about R600 million.

“BEE ownership deals are thus imposing an enormous cost on a country struggling to maintain or expand essential infrastructure…,” says Jeffery.

Land reform has been an admitted failure, with 90% of land reform projects unable to produce a marketable surplus. So government has spent billions of rands in taxpayer money to take hundreds of farms out of production, costing thousands of jobs and billions more in lost revenue.

And so it goes on. This is the ANC’s 20 year scorecard on BEE, as presented by Anthea Jefferey, and it scores an F. It’s time to look past the racial sensitivities and get a real national debate going on this subject before the race engineers annihilate what’s left of the economy.

Is there a better tax system than the monstrosity currently in place?

Written by Ciaran Ryan. Posted in Journalism

Is there a better tax system than the monstrosity currently in place?

Our-Land-our-rent-our-jobs-book-cover-1-500x361Stephen Meintjes, analyst at Momentum SP Reid Securities, and the late Michael Jacques, authors of Our Land, Our Rent, Our Jobs certainly seem to think so. What if we could replace income tax, VAT, customs duties, excise, sin taxes, fuel levies, the Unemployment Insurance Fund (UIF), skills development levies and every other ‘tax it if it moves’ impost with a simple-to-collect tax based on land value?

There is so much invested in the current tax system that it is hard to imagine an alternative. The cost of administering SA revenue systems is about R10 billion a year, and there are an estimated 2 000 registered tax professionals lumping another R1 billion on top of that as fees. A far greater cost is the combined hours and expense incurred by companies, executives, lawyers and the courts dealing with tax matters. That’s a stubborn oak to cut down. But cut it down we must if we want to unleash the true potential of the economy, say the authors.

Then there is the complexity of the tax system. A report by PwC among the top 50 companies in SA found they were subjected to 21 taxes divided between profit, property, employment, indirect, environmental and other taxes.

Governments are loath to abandon the Marxist mantra of ‘progressive tax’ (from each according to his ability, to each according to his needs) as a means of wealth redistribution.

There are multiple alternative ideas to the current tax system, but most have the effect of stifling economic growth and job creation. The authors argue that the existing system punishes enterprise and ingenuity. Hence, tax on profits discourages profits. Value-added tax (VAT) discourages adding value and expenditure. One frequently-proposed alternative is to remove all other forms of tax in favour of increased VAT. This would encourage savings since to pay less tax, people would spend less. SA’s national savings rate is notoriously low precisely because there are insufficient incentives to save.

The solution proposed by the authors seems implausibly simple: establish a national land database and impose a ‘resource rental’ on the land itself. This is how most municipalities used to value land for rates and taxes prior to the introduction of the Local Government Municipal Rates Act of 2004. The authors argue that this resource rental could be phased in over a few years and gradually replace all other forms of tax. The fact that municipal site valuations were so widely employed prior to 2004 means the proposal has a better chance of succeeding in SA than in almost any other country.

How would that help the economy? For one thing, all land would be subject to resource rentals, so communally-owned farms and redistributed land would have to be productively used in order to afford the rental. For that to happen there would have to be security of tenure – such as leasehold and freehold title – as a precondition for gaining access to credit markets and to free up billions of rands in ‘dead capital’ currently tied up in under-utilised land.

Under this scheme, the government would essentially become a rent collector. Airports, toll roads, marine resources, oil concessions and the electromagnetic spectrum would all be treated as rent-earning assets. The income from this would, over time, not only replace all current forms of taxation but, by unlocking productive capacity, generate much higher receipts for the government, both locally and nationally. Local governments in particular would no longer be dependent on hand-outs from central government, and so deliver better quality services to residents.

You would pay rent on your land only, not on the improvements you make to the land – which would be deemed the fruits of your own ingenuity, and therefore for your pocket.

This sounds Pollyannish, but is there any precedent for this elsewhere in the world? In fact, there are quite a few stunning examples, including right here in SA. The land tax as it was commonly known played a crucial role in the industrialisation of Japan and Taiwan, before it became abused by various vested interests. Hong Kong and Singapore are interesting case studies in that the governments own virtually all land and derive considerable revenue from the land for the benefit of all. This in large measure accounts for their low tax rates and consistently high economic growth rates.

It may be that a homeowner in Bryanston, Johannesburg, living in a prime residential area will pay R50 000 or more a month as a resource rental on that land. This sounds like a preposterous amount, but it should be remembered that someone in this income bracket is already probably paying more than this in income tax, VAT, fuel levies, property rates, and so on.

The preamble to the Constitution says South Africa belongs to all who live in it, and that includes all natural resources such as land, air and water. But most land has been sold off as private property, so locational advantage and the resource rental which accrues from this is for the benefit of private property owners.

The argument here is not against private property, and the corresponding right to earn private rentals on property. What is being argued is that “such conflation of private property and a perceived corresponding right to any unearned benefits (arising from such property) has no foundation in natural law and is totally unnecessary”.

The current system punishes the poor in several ways. A subsistence farmer with no legal title to land has to pay VAT on goods whose prices have been inflated by duties and taxes.

Adam Smith in Wealth of Nations spelt out the basis for a just tax system: it should be equitable (taxes being levied according to abilities), certain, convenient and efficient.

He was against a tax on the necessities of life, just as he was against a tax on labour, because these are inflationary and therefore likely to increase poverty.

Though Smith is considered the father of the modern tax system, the authors believe he would be shocked at the “odiousness and intrusion of most taxes”, particularly taxation of company profits and on labour.

For a country in search of inspiration, here’s an idea that deserves a decent airing.

* This article first appeared in Moneyweb.

White expat South Africans returning in record numbers

Written by Ciaran Ryan. Posted in Journalism

passport photoMore than 400,000 white expat South Africans have returned to the land of their birth since the apex of the financial crisis in 2009, according to research by Free Market Foundation economist Loane Sharp. This is based on extensive analysis of job candidates on the database of the country’s largest recruitment firm, Adcorp.

Sharp says SA’s white population of working age (15 to 64 years) peaked at 5.9 million in 1973, but declined steadily to 3.9 million in 2009. Since then, the white population has risen to 4.3 million, a net gain of 400 000 over six years. That’s a substantial brain gain for the country, since most of these returnees bring vast international experience in finance, engineering, medicine and other professions.

Some employment agencies are specifically targeting expatriate South Africans to fill highly skilled positions in sectors such as engineering, mining and construction, and that is accounting for some of the migration back to SA.

Free Market Foundation economist Loane Sharp says returning whites have little trouble finding work because of the high level of skills they bring with them. “The truth of the matter is that SA has virtually zero unemployment in highly skilled professions, so those returning whites of working age – most of whom would be classified as skilled – are easily absorbed into the economy. Those without skills, or without sufficient skills, are those that cannot find work. This is why the overall unemployment rate for the country is officially above 26%.”

A variety of reasons account for the two million drop in the country’s white population between 1973 and 2009. Sharp says many of them left in the 1970s and 1980s out of a disdain for apartheid and fears over what the future held for their children. Those who left in the post-1994 era were pushed out by Black Economic Empowerment, crime and a deteriorating political environment. Thousands of young white graduates with little prospect of employment due to BEE quotas ventured overseas in pursuit of careers, usually in English-speaking countries such as the UK, US, Canada, Australia and New Zealand. Many of these are now returning armed with skills that are still in high demand in SA.

“South Africans working abroad got a rude awakening after the financial crisis in 2008 when they realised their overseas jobs were not as secure as they had once thought,” says Sharp. “Many of them realised there is no such thing as permanent, as in guaranteed, employment, and this is when they started to look for opportunities back in SA. This has been a huge net gain for the country, since we are acquiring skills that might otherwise have been lost forever to SA. In addition to this, they bring experience of working in highly developed economies.”

The Institute of Race Relations estimated that 841 000 white South Africans had left the country between 1995 and 2005, and by some estimates two million South Africans live abroad. Based on more recent figures, SA may be experiencing the biggest in-gathering of its Diaspora since the end of apartheid 25 years ago.

Philip Park, MD of recruitment agency Professional Career Services, says there is a notable influx of returning South Africans looking for work on his firm’s books. Ten years ago, they would have slotted into the larger corporations, but today it is medium-sized firms that are doing most of the hiring. A growing proportion of South African firms are hiring for projects in Africa and elsewhere, particularly in the construction and engineering sectors, says Park.

While the job prospects are good for those with skills of any race, the same is not true for those without education or skills. Sharp reckons the unemployment rate at 26% is skewed by Stats SA’s loose measure of employment – defined as one hour in the survey reference week. He believes SA’s unemployment rate will rise to 40% within seven years, and over 50% if a narrower definition of employment is used.

Employment by numbers (Second quarter 2015)

Looking for work 20.9m

Employed 15.7m

Unemployed 5.2m

Discouraged 2.4m

* This article first appeared on Moneyweb.

The story of SA in two depressing charts

Written by Ciaran Ryan. Posted in Journalism

Two charts tell the story of South Africa Inc. One shows that SA companies cannot invest outside the country fast enough, and the other shows that the JSE All Share index, measured in US dollars, is unchanged since 2007.

Old Mutual economist Rian le Roux put together the following chart which shows SA companies invested abroad to the tune of R80bn in 2014, and more than R60bn on a rolling, cumulative basis up to the second quarter of 2015. Back in 2012 the figure was zero.

Capital flight from SA

Old Mutual chief investment strategist David Mohr says the rate at which SA companies are investing abroad suggests they are nervous about the current operating environment in SA, and see better returns elsewhere.

“Power outages, an unfriendly business environment, rigid labour laws, all the usual suspects account for this migration of capital outside the country,” he says. “If there are any positives to be highlighted as far as SA is concerned, we still have a relatively disciplined fiscal regime and low foreign debt, which should shield us from some of the harsher consequences of delinquent behaviour being experienced by other emerging market countries such as Brazil and Turkey.”

The second graph suggests that virtually all gains on the JSE since 2009 have come by way of rand weakness. If there is a positive to this it is that as the rand weakens it protects investors against a possible bear market. The reverse, of course, would apply: any strength in the currency from here would hurt equities.

The exodus of capital from SA is in large part a vote against the government, which shows no appetite for essential reforms in the areas that investors consider most pressing, such as labour and energy. SA companies have realised that international diversification is a vital hedge against further maladministration. That SAB Miller is now the subject of an attempted buy-out by Anheuser-Busch is a logical outcome of a process which has been two decades in the making.

Larger companies, starting with the mining houses, started the process of international diversification around 1994. Sanctions had kept them out of the race for the juiciest mining assets outside our borders, so when the international embargo was lifted in the early 1990s, there was a sense of urgency in their move abroad. Other companies were quick to follow. The wisdom of this exodus is now plain to see.

The current weak state of the rand will not halt the capital drift. Companies plan for five, 10 or even 20 years into the future.

The common factor in both charts is the rand, which has already breached R14 to the US dollar in recent weeks. There is some consensus that the rand will likely end this year around current levels of R13.50 – R14, but what if there is a blow-out to R16 or even R18 in the next two years, as some have suggested? This is not beyond the bounds of possibility, as the rand has already skidded from R7 to R14 to the US dollar since 2011. The emerging market rout is by no means over, which means further pressure on the rand. That, in turn, is going to make it harder to reduce the current account deficit. Inflationary pressures – mercifully subdued for the moment – could resurface if the rand takes further strain.

If it’s more bad news you want, the South African Chamber of Commerce and Industry (Sacci) has just delivered a corker. This week it announced that its business confidence index sank to a 22-year low, requiring policymakers to do something extraordinary to right the tilting ship. We have to go back to before the 1994 elections to match anything like the current mood of despondency.

Most of the large cap companies on the JSE now earn more than half of their revenues offshore, a prescription which smaller cap companies, such as Truworths, are determined to emulate. It doesn’t always go according to plan, as Tiger Brands discovered when it purchased Nigeria’s Dangote Flour Mills for R1.59 billion in 2012 only to see the value of this investment slip to zero and even negative territory.

Sappi is a good example of how international diversification has cushioned its mattress. Roughly half its assets are in southern Africa and half in Europe, though two-thirds of its sales come from Europe. It’s a similar story at Steinhoff, which derives about two-thirds of its sales from Europe where it houses 59% of its assets. Africa now accounts for just 31% of SAB Miller’s revenue, and 27% of MTN’s, and a quarter of Aspen Pharmaceuticals. Wine and spirits group Distell is making inroads internationally, where it now derives roughly a third of sales. In each case, this is the result of investment decision taken a decade or more ago.

Now, of course, is not a good time to be shifting money abroad. Those who made this decision five or 10 years ago are smiling, but if you believe the rand will hit R18 to the US dollar over the next few years, then a case could be made for getting out now. But as Warren Ingram of Galileo Capital cautions, if you invest abroad now and the rand strengthens from here, you are locking in a certain loss. Recall what happened in 2002, the last time the rand hit R14 to the dollar. By 2005 it had dropped to below R6, and there are many sour memories of the rush to expatriate funds when the rand was weak. Many investors have yet to recover from this shock.

This is the new corporate South Africa: moving the furniture abroad as fast as possible.

* This article first appeared in Moneyweb.

Lessons for SA from South America

Written by Ciaran Ryan. Posted in Journalism

Two South American countries – Colombia and Venezuela – offer lessons in governance that we would do well to heed. Colombia is now one of the fastest growing economies in South America. Venezuela, ravaged by a drop in oil prices and poor leadership, is moving in the opposite direction.

I highly recommend the Netflix series Narcos for some background on what Colombia has been through during the reign of drug kingpin Pablo Escobar. Also worth watching is the Spanish-language (with sub-titles) Palbo Escobar – El Patron del Mal (Pablo Escobar – The Lord of Evil). This provides some excellent context to the recent resurgence of Colombia as South America’s third largest economy.

This article first appeared in Moneyweb.

South AmericaColombia, once the drug den of the world and now one of its fastest growing economies, has a few lessons to teach SA. This is true also of its neighbour Venezuela, now the basket case of South America. In Venezuela’s case, the lessons are tragic.

Like most neighbours, Colombia and Venezuela haven’t always seen eye-to-eye. The two countries nearly came to war in 2009 when Colombia arrested four Venezuelan soldiers who crossed the border, and has repeatedly accused its neighbour of harbouring Marxist FARC guerrillas.

Relations have improved since then, but in most other respects the two countries are headed in entirely different directions.

Colombia, once the regional hub for drug traffickers and kidnappers, has undergone a remarkable transformation in recent years. Its economy is the fastest growing in the region after Bolivia, clocking an average 4.3% growth between 2001 and 2014. It also ranks second in the 2015 Economic Freedom Index, behind Chile, the result of vast improvements in labour, trade and investment freedoms.

The same index lists Venezuela as the second worst country in the region in terms of economic freedom, just a shade above Cuba.

The Colombian government simplified and shredded laws that stood in the way of growth, reduced tax on business and signed free trade agreements with scores of countries. It offers assistance for start-up businesses, and a housing boom – powered by government subsidies and soft bank interest rates – has helped the construction sector achieve 10% annual growth in recent years. The government is also spending huge sums on infrastructure, which is expected to boost economic growth by 0.7% a year.

Colombian President Juan Manuel Santos, re-elected for a second term in 2014, has tried to distance himself from the policies of his predecessor, Álvaro Uribe, who resolved to smash FARC guerrillas and reduce crime. Santos has put economic vitality at the forefront of his government. He has done far more than his predecessor in reaching an accommodation with the guerrillas and reducing crime, which by the latest count is down 30% over the last decade.

A peace deal thrashed out in Havana, Cuba, between FARC guerrillas and the government last year promises to bring an end to all illegal drug activity and redistribute land to the rural poor. This is a war that has been waged with varying levels of intensity since 1948. The writing was on the wall for FARC once the US offered Cuba and Iran an olive branch, and by some reports, just a few thousand guerrillas remain in remote parts of the country. The rest have opted for reintegration and a chance to launch a new career in South America’s hottest economy.

Astonishingly, Colombia has now surpassed Argentina as the region’s third largest economy, after Brazil and Mexico.

The story in Venezuela could not be more different. Its growth rate averaged 2.5% between 1998 and 2014, but is expected to shrink by 7% this year. The economy has been savaged by the drop in the price of oil, on which it depends for 95% of its foreign earnings. Inflation is likely to top 150% this year, the highest in the world, and there is a fear the country will default on its foreign debt in 2016.

The country operates a three-tier official exchange rate, alongside the black market rate which has halved against the US dollar this year alone. South Africans who lived through the two-tier financial rand under apartheid will understand the propensity for fraud in such a system, where those with access to the cheaper financial rand could profit 20% or more by converting these to so-called commercial rands. Venezuela’s weak currency makes it a bargain for tourists with hard currency, but the country’s reputation for crime and shortages is keeping all but the hard-core backpackers away. Some hotels, while offering great deals, are asking tourists to bring their own toilet paper and soap. Shortages of food, medicine and other basic necessities, most of which are imported, are blamed on the declining revenues from oil sales.

Under the late President Hugo Chávez, Venezuela was venerated by post-Soviet coffin bearers as a socialist Valhalla that would redeem Karl Marx’s fading vision of a workers’ paradise. That vision lies in tatters under his successor, Nicolás Maduro, who seems cursed with bad luck, bad governance and a gaffe-prone tongue. Not to mention out-of-control corruption: an estimated US$20 billion of the US$59 billion allocated for imports in 2012 disappeared through fraud, according to the former head of the country’s central bank, Edmée Betancourt.

Venezuelans have responded in the only way they can: emigration. Research by Simón Bolívar University’s economics department says 1.2 million Venezuelans now live abroad, a 2000% increase since the mid-1990s. Nearly one in ten of those remaining are considering moving abroad.

Brazil, the largest economy in the region, squats uncomfortably between these two. Though it has a sizeable industrial base, it reliance on commodity exports has pushed it into recession. Like SA, its growing welfare bill has crippled its budgetary flexibility, though with an unemployment rate of just 6%, Brazilians are better able to ride out the storm.

All countries in the region look with envy at Chile and Colombia, the two fastest growing countries in South America. SA would do well to study them too.

Update: It is worth noting that Colombia has experienced a 60% drop in both crime and drug production and an eight-fold increase in tourism in a little less than a decade. A key ingredient in this astonishing success was The Way to Happiness campaign initiated by the Church of Scientology in collaboration with senior members of the Colombian military, police and political parties. The campaign emphasises common sense moral values. Once the campaign was embraced by the police and military, it was cascaded down to ordinary people and is widely acknowledged to have played a major role in the turnaround in Colombia’s fortunes.