Author Archive

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.

Eskom on the mend, but load shedding likely to continue until late 2021

Written by Ciaran Ryan. Posted in Journalism

CEO André de Ruyter says power supply should be stabilised by April next year, but load shedding remains a risk. From Moneyweb.

The utility is losing about R2.5bn a year to theft, illegal connections and meter tampering, and is taking steps to combat this. Image: Shutterstock
The utility is losing about R2.5bn a year to theft, illegal connections and meter tampering, and is taking steps to combat this. Image: Shutterstock

The good news is that Eskom is on the mend and plugging leaks across the organisation, such as the recovery of the R31.4 billion owed to it by municipalities and trimming staff by 2 000 to 44 000 – with a target to trim a further 6 000 by 2023.

Read: Eskom gets tough with errant municipalities, grabs cash and land

The bad news is that load shedding is here to stay a while longer, possibly until late 2021.

That was the message from Eskom CEO André de Ruyter, addressing the media on Thursday in a quarterly update on the state of the system.

“If Eskom fails, that poses a strategic risk to country. We’re doing a lot of work to recover stability of the generation system, and step up its reliability,” he said.

Latest round of load shedding

The load shedding experienced between July and August was the result of increased demand as government relaxed the lockdown, coupled with high levels of unplanned losses throughout the generation fleet. This forced it to rely on diesel-burning Open Cycle Gas Turbines, resulting in R800 million more being spent on fuel than planned.

The average age of its generation fleet is 39 years, with several units reaching end of designed lives. Failure to conduct the mid-life refurbishments required means Eskom is now having to play catch-up, which it is doing. Planned maintenance will impact about 12% or 6 000 megawatts (MW) going forward. This is necessary, said De Ruyter, to restore reliability to the grid.

Read: Eskom calls for battery-power storage

To address the medium-term shortfall, 11 800MW of additional capacity and 2 000MW of emergency power is being connected to the grid in the coming years. More than R100 billion will have to be invested in strengthening the transmission grid over the next decade.

A key area of focus is remedying the design defects in Medupi and Kusile power stations – the newest to be added to the fleet – to bring the units up to design output of about 800MW. Both power stations have a combined 12 units which, when brought up to design specifications, will alleviate the burden on the grid.

Work is also underway to extend the life of the Koeberg nuclear power plant for a further two decades.

Three of six new steam generators have been delivered to the site, and Unit 2 at Koeberg is now back on line after completing a maintenance programme.

Billions being lost to theft

The utility is losing about R2.5 billion a year to theft, illegal connections and meter tampering, and steps are being taken to combat this. There were 1 485 incidents of cable theft in the last year, costing roughly R50 million in asset losses.

The more important loss was the reduction in reliability of supply to customers, said De Ruyter.

“We are working with law enforcement, but we are asking South Africans to act as our eyes and ears [to report cable theft].”

Municipal debt still poses a major challenge, with R31.4 billion owed by municipalities as at the end of August. This forced Eskom to take assertive steps to arrest further accumulation of debt and recover exiting debt by obtaining court orders to attach bank accounts and seize assets. A recent verdict in the Johannesburg High Court validated Eskom’s debt recovery approach. The case was brought by Pioneer Foods to set aside Eskom’s decision to interrupt electricity supply to Walter Sisulu Municipality in the Eastern Cape.

The bulk of Eskom’s power is coal-fired, and coal stockpiles are currently around 58 days. Progress has been made in reducing emissions – from 0.48kg/MWh in the last two years to 0.35/kg/MWh this year. Overall emissions in previous years were aggravated by poor performance at the Kendal power station, which is in the process of acquiring new technology to address this.

Government told to provide evidence for ongoing lockdown or prepare for court

Written by Ciaran Ryan. Posted in Journalism

The latest lockdown extension is irrational and must be lifted immediately, says Dear South Africa. From Moneyweb.

Dr Nkosazana Dlamini-Zuma. A recent WHO paper estimates that the infection fatality rate of the virus is less than 0.2%. Image: Jairus Mmutle, GCIS
Dr Nkosazana Dlamini-Zuma. A recent WHO paper estimates that the infection fatality rate of the virus is less than 0.2%. Image: Jairus Mmutle, GCIS

Public participation group Dear South Africa has asked Cooperative Governance and Traditional Affairs Minister Nkosazana Dlamini-Zuma to provide the evidence that supported her decision to extend the lockdown earlier this month or prepare for an urgent court date.

In a letter delivered to the minister on this week, Dear South Africa attorneys Hurter Spies Inc asked the minister to provide written reasons for the extension of the lockdown announced on October 14, backed by supporting documentation and expert evidence. She has also been asked to give a commitment that no further lockdowns will be announced.

The minister has been given until October 30 to reply or, according to the letter, Dear South Africa “will be compelled to approach the high court for appropriate relief”.

Read:Court cases are piling up against government lockdownHigh court says some lockdown restrictions invalid

Government declared a national state of disaster on March 15 under the Disaster Management Act, and has extended this five separate times since then. Most South Africans were initially supportive of the lockdown due to the unknown threat from the Covid-19 virus, though support has dwindled according to various public participation campaigns run by Dear South Africa.

The law

The Disaster Management Act empowers the minister to issue regulations or directions where these are needed to assist or protect the public, to provide relief, or protect property. Disasters may only be declared where existing legislation and contingency arrangements are inadequate.

In terms of Section 37 of the Constitution, a state of emergency may only be maintained for 90 days before its extension must be approved by Parliament.

No such parliamentary approval has been obtained for the latest extension.

Hurter Spies attorney Daniel Eloff says seven months into the lockdown, there is no evidence that the extended lockdown is curbing the spread of the virus. The number of cases peaked in July and has been in steady decline since then.

“The Covid infection rate peaked several months ago, and the original reason given for the lockdown was to stop the healthcare system being overloaded. We now know the healthcare system is far from overloaded, and the additional facilities provided to cope with the expected wave of infections have been closed because the wave has passed.”

Earlier cases brought before court

Meanwhile, judgment is expected this week on the case brought by Liberty Fighters Network (LFN), which successfully challenged government’s lockdown regulations in court in June. Government appealed the decision.

LFN founder Reyno de Beer says if the court decision goes its way, there is a possibility that the tobacco ban could return.

This is because the Johannesburg High Court decision in favour of LFN excluded regulations pertaining to the tobacco ban, which was then being heard separately as a result of a case brought by the Fair Trade Independent Tobacco Association (Fita). Fita chair Sinenhlanhla Mnguni says this is unlikely as agreement was reached with government to take a consultative approach with the industry should it want to reimpose a tobacco ban.

The Pretoria High Court earlier ruled in favour of the tobacco ban, and dismissed Fita’s appeal.

‘Wildly inaccurate’ modelling

The Dear South Africa letter to government says the modelling relied upon by government has been shown to be wildly inaccurate and has been abandoned, according to Dear South Africa. The number of recorded Covid-19 deaths has been far lower than expected and currently totals just over 18 000.

The SA Centre for Epidemiological Modelling and Analysis (Sacema) abandoned its model soon after it was published, and was replaced by the National Institutes for Communicable Diseases’ ‘Epi Model’ which has not been updated since June. The Epi Model has proven inaccurate when tracked against actual cases. It projected 40 000 deaths by the end of November.

The Actuarial Society of South Africa has also modelled the likely spread of Covid-19, and slashed its original projections of deaths to 27 000. Pandemics and Data and Analytics (Panda), which updates its model regularly, estimates just 20 000 deaths by the end of the year.

The World Health Organisation (WHO) recently published a paper by world famous epidemiologist John Ioannidis which estimates that the infection fatality rate of the virus is less than 0.2%.

Proposed new ‘control’ regulations

In a separate case, AfriForum announced last week that it will fight Health Minister Dr Zweli Mkhize’s proposed regulations to supervise and control notifiable diseases in future. These proposed regulations will give far-reaching powers to the minister to combat future diseases perceived as public risks, similar to that applied by government in terms of the Disaster Management Act in response to Covid-19.

There is a growing fear that government has planned to retire the draconian measures of the Disaster Management Act and use health regulations instead to achieve much the same goals (including economic lockdown).

Several organisations are planning to challenge this in court should these new health regulations come into force.

Some of these proposed powers include:

  • Prohibiting travel between provinces or districts;
  • Prohibiting public meetings;
  • Imposition of curfews;
  • Closure of educational institutions; and
  • Placing people under compulsory quarantine by simply publishing a notice in the Government Gazette.

“The disastrous manner in which government handled the Covid-19 pandemic provides ample reason why the state should not have such power over citizens,” says Natasha Venter, campaigns manager at AfriForum.

“It is even worse when so much power is vested in one minister,” she adds.

“AfriForum will oppose the regulations if approved by Cabinet. We cannot afford any future irrational lockdown regulations by government.”

How lobbying has skewed national figures

Written by Ciaran Ryan. Posted in Journalism

Like company profits, they are prone to the deft persuasions of accountants and their clients – and there don’t seem to be any SA lobbyists. From Moneyweb.

Image Shutterstock
Image Shutterstock

Accountants have tried for years to find a common language that would allow users of financial statements to make comparisons between companies operating in different parts of the world.

In an ideal world, an investor in London would be able to compare the financials of a company in New York with the same surety as one in Tokyo or Lagos. As capital races around the world, those pushing the buttons want a common language to understand whether a profit is measured the same in China as in the UK or US (it isn’t).

The goal of a universal language for accounting remains elusive – and, like much else in the world of big money, prone to lobbying by large corporations and their accountants.

Influence

“Just a small change in accounting standards may substantially alter the flows of economic benefits to affected parties,” according to a study on lobbying to influence accounting standards published in the Copernican Journal of Finance & Accounting.

“These may have strong incentives to influence the process of standard setting. Competing goals create conflicts about the content of accounting standards.”

A University of Naples study found the lobbyists’ success “is linked to the impact that the respondents have on the viability of the IASB [International Accounting Standards Board]”.

In other words, the bigger the organisation, the more likely it is to sway the standard setters.

The IASB is the body charged with formulating International Financial Reporting Standards (IFRS). More than 130 countries, including SA, followed the EU’s lead in adopting IFRS from 2005. Companies in the US apply the Generally Accepted Accounting Principles (Gaap).

The main difference is that Gaap is rules-based and IFRS is principles-based.

Rules are more rigid than principles, yet both standards purport to offer transparency, consistency, accuracy and honesty.

That sounds reassuring, but investors in Tongaat and Steinhoff will be left wondering where these standards deserted them.

Read: Steinhoff, Tongaat woes raise South African auditor scrutiny

In Tongaat’s case (to take just one example), a self-serving interpretation of the revenue recognition rule – IFRS 15 – meant land sales were counted before they were hatched.

Accrual accounting allows revenue to be recognised where a transaction has been concluded, though payment has not yet been made. Because revenue is not the same as cash, this allows an element of judgement to creep in. IFRS 15 says the risks and rewards of ownership must pass from the buyer to the seller, and there must be a reasonable assurance that payment will be made before revenue can be counted.

Land sales are notoriously convoluted, particularly where development is involved, and payment can be delayed for any number of reasons, such as zoning approvals. In Tongaat’s case, revenue appears to have been concocted out of thin air, to the benefit of the then directors’ bonuses.

Read: Will a firmer hand on the audit profession restore its credibility?

Joel Litman of US research house Altimetry analyses investments by reconstructing published financial statements to account for distortions introduced by Gaap and IFRS (for example, adjusting for the different ways companies account for stock). He has identified 130 such distortions that, when adjusted, provide a more consistent basis for investment comparison.

In many cases, says Litman, published financial statements are all but useless.

If that’s the case, the goal of a common accounting language seems as far off as ever.

World trade and cherry-picking

Several studies show that harmonisation of accounting standards, however imperfect they have been applied, has been a benefit to world trade.

But some, it seems, are benefitting more than most.

Some countries adopting IFRS have chosen to leave out those parts that don’t suit them while others, like China, chose to stick with local accounting rules with an undertaking to eventually move towards internally recognised standards. This explains why many analysts distrust Chinese financial statements, and are equally sceptical of its nationally reported figures.

The Big Four

Richard Brooks – author of Bean Counters: The Triumph of the Accountants and How They Broke Capitalism – points out that the accounting standard-setters are swimming in alumni from the Big Four accounting firms, ensuring that the rules are crafted to suit themselves and their clients.

Read: How the accountants mangled capitalism

This lobbying has skewed national statistics and puffed up corporate balance sheets so they look more muscular when presented to banks and investors.

The recent adoption of IFRS 16 forced companies to bring formerly off-balance sheet leases back on the balance sheet. This closed an accounting loophole that allowed airlines (as an example) to operate fleets of planes without recording them on their balance sheets on the basis that they were leased, not owned. The effect was to reduce liabilities, and hence gearing ratios – which is what banks and most investors want to see.

“One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet,” joked David Tweedie, former chairman of the IASB.

A PwC study of more than 3 000 companies found that the new accounting rules for leases would increase debt loads by 22%, and boost Ebitda (earnings before interest, tax, depreciation, and amortisation) by 13%. It’s not hard to see how a change in rules yielding such handsome growth in earnings for no extra work would attract the very best lobbyists money can buy.

Impact on national statistics

“The adoption of IFRS has impact on a country’s national statistics. Data on productivity, efficiency and profitability are often times collected by the government statistical authority for national reporting,” according to a study published by the Mediterranean Journal of Social Sciences.

Says Nicolaas van Wyk, CEO of the SA Institute of Business Accountants: “The way accountants prepare financial statements is not a politically neutral affair. Every year millions of companies prepare their financial statements using a set of standards developed by an international organisation, the IFRS Foundation.

“The world’s profits are literally determined by one organisation,” says Van Wyk.

“Evidence suggests [and logic would dictate] that the process of issuing and adopting these standards are subject to lobbying. Does this lobbying favour large conglomerates, special interests, Big Four audit firms, or does it potentially harm job creation and economic development in Africa?”

Various studies show the voluntary adoption of IFRS results in more volatile earnings performance, in large part because the recognition of losses is more immediate than was previously the case under local accounting standards.

Van Wyk points out that lobbying is an inevitable part of economic life, but then where are the SA lobbyists at the IASB? Accountants elsewhere in Africa are asking the same question.

“We need to look more closely at the accounting standards we are using,” says van Wyk.

“It seems we may have blindly adopted standards that were influenced by lobbyists in Europe or the US, and that these standards suit the developed countries but not us.” Tweet

New expropriation bill narrows the focus for no compensation

Written by Ciaran Ryan. Posted in Journalism

But continues a long-standing disrespect for property rights in South Africa. From Dear South Africa.

Private Property - DearSA
When private property is no longer private

The expropriation without compensation (EWC) debate refuses to die. In 2018, when EWC first entered public debate, the idea was to amend Section 25 of the Constitution which protects South Africans against arbitrary deprivation of property.

Section 25 has been an impediment to those pushing for EWC, but to amend it would require a 75% – or two-thirds – majority in Parliament, depending on which legal advisor you talk to.

The new Expropriation Bill introduced early in October 2020 will replace the 1975 Expropriation Act, and should have an easier passage through Parliament, requiring a majority of just 50% plus one.

However, it still has to go through the public comment stage, which so far has been stridently against any tampering with property rights. So this is your chance to make your voice heard.

Expropriation has been a feature of SA’s legal landscape since the apartheid years, but compensation was always part of the equation (and since 1994, protected by the Constitution).

The new Expropriation Bill will allow Expropriation without compensation when it is in the public interest or for “public purpose”.

The introduction of this new bill does not mean amendment of Section 25 of the Constitution has been buried despite there being very little public support for it (and what support there is, is getting smaller, as the Dear South Africa campaigns demonstrate).

If you’re looking for reasons behind rising capital flight and emigration, Martin van Staden, legal researcher at the Free Market Foundation, reckons he has found the answer: “Even discussing EWC has triggered capital flight,” he says. “This shows up in the Fraser Economic Freedom of the World 2020 report, where there is declining trust in SA’s property rights.”

Going down the EWC road puts us in company with the likes of Zimbabwe and Venezuela, says van Staden, with all that implies: rising emigration, currency debasement and economic collapse. The emigrants are those with the skills and the money.

Those in favour of EWC point to the disproportionate amount of land still in white hands and the lack of restitution for apartheid- and colonial-era land grabs. Despite many surveys attempting to quantify this disparity, there remains doubt as to the actual state of land ownership. Nor do we have much idea of what land is owned by the state, much of which could be made available for distribution to the poor. 

EWC has become a racial profiling exercise influenced by political agendas, and that has made it potentially poisonous. Owning 10,000 hectares in the Karoo, compared to five hectares in Stellenbosch, means very little unless we start to look at the economic usefulness of the land.

Van Staden believes the government may be getting ahead of itself in trying to pass the new Expropriation Bill without first amending Section 25 of the Constitution. Any attempt to expropriate property without compensation is sure to end up in the Constitutional Court. 

Should the bill get passed into law, the government may simply not enforce it, a way of sterilising its own legislative decisions. But should it enforce it, our descent to a failed state will be virtually assured. Either way, foreign investors – who suspect a government capable of taking land without paying for it might also do the same to other assets – will avoid South Africa, even more so than is currently the case.

The new Expropriation Bill proposes leaving it to the courts to decide on the level of compensation in the case of expropriation, but defines the following circumstances where nil compensation will be paid:

  • Where land is unused, and the owner has no intention of developing or using it to generate income, but to hold it for capital appreciation;
  • State-owned land acquired for “no consideration” that is not being used for its core functions, nor likely to be used for these functions in future;
  • Where the owner has abandoned the land and exercises no control over it, despite possession of a title deed;
  • Where the market value of the land is equivalent to, or less than, the present value of direct state investment or subsidy in the acquisition and beneficial capital improvement of the land; 
  • When the nature or condition of the property poses a health, safety or physical risk to persons or other property;
  • Should a court or arbitrator determine that an amount of compensation in terms of section 23 of the Land Reform (Labour Tenants) Act, “it may be just and equitable for nil compensation to be paid, having regard to all relevant circumstances.”

Public Works and Infrastructure Minister Patricia de Lille explained the new bill had passed Constitutional muster with the Chief State Law Advisor, while the previous Expropriation Act was inconsistent with the Constitution.

Van Staden says one of his chief concerns with the new bill is that it treats government and citizens differently, and that could further eviscerate the rule of law in SA. It follows a long-standing pattern of disrespect for property rights dating back to apartheid and pre-apartheid years. 

Make sure to have your say on the new Expropriation Bill.

Why gold’s run has plenty more steam in it

Written by Ciaran Ryan. Posted in Journalism

If you believe the world’s financial system is robust, gold is probably not for you. From Moneyweb.

Flows into gold ETFs have been outpacing flows into S&P 500 stocks this year. Image: Waldo Swiegers, Bloomberg
Flows into gold ETFs have been outpacing flows into S&P 500 stocks this year. Image: Waldo Swiegers, Bloomberg

The case for buying gold has always been to hedge against risk, and those risks have become radioactive.

Look at the following chart from Crescat Capital, a hedge fund manager leading the Bloomberg US performance rankings for three months in a row to August this year. Crescat is bullish on precious metals, and believes the best is yet to come for gold.

The graph shows a correlation between the ‘twin US deficits’ (budget and current account) and the gold-to-the-S&P 500 ratio. The higher the deficit, the higher gold ratio seems to move.

Given the meteoric rise in the twin deficits, gold could be poised for another major move up.

Another factor in favour of precious metals producers is the relative health of their balance sheets. They have spent the last few years paying down debt, leaving them strongly positioned to benefit from any further rise in the metal price.Read: Gold may hit record before year-end

Crescat points out that miners have been reluctant to spend capital even though gold prices have been moving higher. The result is a constrained supply pipeline that provides further underpinning to the metal price, and a huge increase in free cash flow that will either go into expansion or to shareholders.

At the start of 2020, the rate of inflows to gold exchange-traded funds (ETFs) started to outpace flows into S&P 500 stocks.

Gold and silver junior stock prices have outperformed the broader stock market since 2019.

Despite all these positives, precious metals stocks are still near record lows when compared with global stocks.

Krishan Gopaul of the World Gold Council points to another development that could put further fire under the gold price: with so many UK property companies putting a freeze on withdrawals by investors, liquidity risk is now rising – and not just in the UK.

“Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. In these instances, when liquidity may fall for other investments, gold can act as a genuine diversifier over the long term,” says Gopaul in a recent commentary.

Gold suffers none of the liquidity constraints imposed by property managers on their investments. Physical holdings of gold by investors and central banks total £2.7 trillion (R58.1 trillion), with an additional £700 billion (R15 trillion) in financial market instruments such as derivatives.

“In stark contrast to many financial markets, gold’s liquidity does not dry up, even at times of acute financial stress,” says Gopaul.

Source: ShareMagic

Another development highlighted by Crescat is the renewed interest in junior miners, which are now starting to outperform the seniors.

The bottom line is that central bank money printing, such as we are now seeing around the world, will only support financial asset bubbles for so long.

“Ultimately, quantitative easing drives flows out of overvalued stocks and credit and into undervalued precious metals,” says Crescat.

“Fiat currencies around the world are in a race to the bottom. The price of gold has been rising across all of them.”

Legendary investor Warren Buffett once remarked that Martians would marvel at earthlings who dig up gold and then rebury it in vaults. Buffett was never a fan of gold, but appears to have changed his tune, loading up recently on 21 million shares in Barrick Gold. He appears to be betting against the US, and has been selling US banks JP Morgan and Wells Fargo (though he is also loading up on Bank of America).

The easiest way buy gold is through Krugerrands, ETFs, and – and a more recent development – digital gold in the form of Paxgold. This is digital investment fully backed by physical gold and is available through Revix.

Mining exploration finally gets some love from regulators

Written by Ciaran Ryan. Posted in Journalism

Industry wants government to emulate Canada’s hugely successful exploration model to unlock financing. From Moneyweb.

A flow-through tax incentive wouldn’t hurt SA’s revenue collections and would deliver considerable macro-economic impact, including immediate job creation. Image: Shutterstock

A flow-through tax incentive wouldn’t hurt SA’s revenue collections and would deliver considerable macro-economic impact, including immediate job creation. Image: Shutterstock

It’s astonishing how fast things can change in a few months. A year ago mining exploration, while not exactly dead, was gasping for air.

“There’s no reason why SA should not account for a far larger share of global investment in mineral exploration,” says Errol Smart, MD of junior miner Orion Minerals, which has invested R450 million over the last five years on the Prieska Copper-Zinc Project in the Northern Cape.

Smart was speaking at the Joburg Indaba last week. This is a bold statement, given the wholesale desertion of SA as an exploration venue in the last 10 years.

Orion is reviving a copper and zinc deposit abandoned 30 years ago by Anglovaal, when it ran into technical difficulties and sharply falling commodity prices.

“I went looking elsewhere in the world for minerals and eventually came back to SA,” says Smart.

“Geologically, the Northern Cape is excellent. We have 23 commodities of interest on our property, from nickel and copper to rare earths.

“There are few places in the world that have been underexplored, and yet have superior geological endowment. The Northern Cape is one of them. Give us the right regulatory environment and some seed capital, and exploration will explode.”

Read: While no one was looking, a miner pulled off a major gold find

Glen Mc Gavigan, head of technical and projects at Kumba Iron Ore, echoes this view: “The Northern Cape is underexplored. These mines we are working were mostly found in the 1950s with some deposits in the 1980s. We need to look again.”

Exploration tech has changed the game

Exploration technology has evolved in leaps and bounds since the 1980s. There are new technologies that can be applied to the local terrain, with potentially huge deposits waiting to be discovered.

SA has among the richest mineral endowments in the world, yet accounts for less than 1% of the $10 billion global exploration budget: the result of previous government hostility to mining and several early iterations of a Mining Charter that insisted on black economic empowerment (BEE) participation in exploration, one of the riskiest sectors of the economy.

This made no sense to mining investors, particularly those willing to put money up for high-risk, early stage exploration.

Why, they wanted to know, should they have to take on BEE partners who carry none of the downside risks, but all of the upside?

When Gwede Mantashe took over as mines minister he got the message, and BEE obligations were removed from the latest version of the Mining Charter for those seeking exploration licences.

“The Covid crisis has changed things and the big difference is the government and industry are talking to each other rather than confronting each other through lawyers,” says Smart.

The Canadian model, and why it would work in SA

One plan on the table to unlock financing for exploration is to adopt the hugely successful Canadian model of ‘flow-through’ shares (FTS).

An FTS is a type of share issued by a corporation to a taxpayer.

It allows the exploration company to raise finance through the issue of shares, and pass its tax benefit on to the taxpayer. The taxpayer is then able to sell that share to others looking for a tax benefit.

In practical terms the introduction of this model in SA would have little or no negative effect on tax revenue (due primarily to the secondary and induced taxes resulting from exploration expenditure, such as PAYE on salaries and value-added tax on goods and service providers) – and it would allow for a potentially huge injection of capital at the local level, where it is needed most.

It would also open up SA exploration for foreign capital.

As things stand, Smart estimates that every R100 spent on exploration expenditure results in R30 flowing to the South African Revenue Service (Sars) as secondary and induced taxes.

Read: South Africans are making waves in North American mining

A study by PwC suggests the introduction of FTS could be close to revenue-neutral for Sars by allowing investors to claim their total equity investment in an exploration company as a deduction against earnings and thus experience the benefit of a small deduction (28% of the value invested for companies or 45% for marginal taxpayers).

Exploration expenditure spent within one year after the investment will result in secondary and induced taxes roughly equal to the reduced direct taxes that the investors, who would be a blend of both corporate and marginal tax payers, benefitted from as a tax reduction in the same year. The exploration company in turn sacrifices its tax deduction for the exploration capital expenditure and thus pays taxes earlier when mining commences.

SA ‘needs’ this flow-through incentive

“We have fantastic Tier 1 [large, low-cost and long-life] deposits in SA that have not been touched,” says Smart.

“The volume of exploration capital flowing to the TSX and TSX Venture Capital market in Canada has been built largely on the back of the flow-through incentive. We need to introduce this in SA.

“The recent ANC economic policy document suggests that investors in exploration should be incentivised, so we think government should be receptive to this proposal,” says Smart.

“The big benefit is that we are not asking government to fund exploration; rather we are incentivising profitable businesses and individuals to direct their reinvestment of profits to a deserving industry with large macro-economic impact and immediate job creation.”

Read: SA looks to mining industry to fuel Covid-19 recovery

Unlocking finance is just one part of the puzzle in reviving exploration. The challenges in obtaining exploration licences and the need to wade through the bureaucratic miasma have also been identified as obstacles to investment.

Mining executives have been working with the minerals department and the Council of Geosciences to streamline the licence-issuing process.

Ranking system to cut red tape

“You cannot have a one-size-fits-all approach to mining regulations,” says Smart.

“We need a ranking system so that those licences that have little or no environmental impact can be fast-tracked. The same applies to other departments that get involved in the issue of licences, such as Heritage, Water Affairs and Human Settlements.”

With these problems solved, SA mining could again become a world leader.

“In 2007, mining was seen as sunset industry, and it took a lot of work to demonstrate this was not the case,” says Mosa Mabuza, CEO of the Council for Geoscience, also speaking at the Mining Indaba.

“We believe it is a sunshine industry. There is no reason we shouldn’t have the world’s largest share of global exploration and it can be done in three to five years.”

Former Billiton CFO Sir Mick Davis told the Indaba that SA mining will only survive if it can encourage future new investment.

This requires three elements to be settled, he said:

  • There has to be absolute clarity on how much the investor owns of what they invest in, and the extent of value leakage to meet the government’s objective on empowerment “needs to be defined and locked in stone”;
  • The lack of infrastructure required to support the industry both in power and logistics needs a clear government plan – even if the industry has to play a role in the development of infrastructure; and
  • There has to be an agreement with labour as to what the rules of engagement actually are, “and the industry cannot be part of a political interplay between government and labour”.

MRC chair steps down after being charged with assault in Australia

Written by Ciaran Ryan. Posted in Journalism

While pursuing defamation charges against activists in SA. From Moneyweb.

MRC owns the Tormin Mineral Sands project north of Cape Town and is involved in the controversial Xolobeni Mineral Sands project on the Wild Coast. Image: Shutterstock
MRC owns the Tormin Mineral Sands project north of Cape Town and is involved in the controversial Xolobeni Mineral Sands project on the Wild Coast. Image: Shutterstock

Australian press reported on Friday that MRC (Mineral Resources Commodities) executive chair Mark Caruso has stepped down from the board after been charged with common assault and unlawful trespass following an alleged incident.

The incident reportedly involved Caruso assisting a friend in the enforcement of an abandonment order, and a subsequent property seizure and delivery order. An abandonment order is when a tenant leaves a property before the end of the tenancy agreement without notifying the landlord or letting agent.

Caruso has stepped down as a director but remains in place as CEO. Image: Supplied

According to MiningNews.net, Caruso has stepped down as a director of the company while he defends the charges, but remains in his role as CEO.

Caruso told the company that he believed he was acting with lawful authority and in accordance with all relevant laws.

The Australian Financial Review reported that Caruso had pleaded not guilty to the charge of unlawful trespass and would contest a further three charges, two of common assault and one of aggravated home burglary. Caruso has also resigned as chair of Connexion Telematics, a company involved in the development of smart car technology.

Controversial projects in SA

MRC owns the Tormin Mineral Sands project 360km north of Cape Town. It is also involved in the Xolobeni Mineral Sands project on the Wild Coast, a venture mired in controversy and apparent stalemate while pro- and anti-mining activists slug it out. Anti-Xolobeni mining activist Sikhosiphi ‘Bazooka’ Rhadebe was gunned down by unknown assailants in 2016.

MRC and Caruso filed defamation suits and are seeking more than R14 million in damages against six South Africans either critical of or opposed to its mining activities in SA.

Two attorneys with the Centre for Environmental Rights were sued after giving a presentation at the University of Cape Town where they criticised the company’s environmental practices at Tormin. Caruso and MRC are seeking R10 million damages from social worker and journalist John GI Clarke for allegedly implicating MRC in the murder of Rhadebe, a charge that Clarke denies. Also being charged for defamation is environmental lawyer Cormac Cullinan after a radio interview in which he suggested pro-mining representatives of the local community had been bought off.

Read:Another tetchy AGM for Perth-based MRCProtests grow over defamation suits against environmentalists

All six defendants claim the defamation suits filed by Caruso and MRC are ‘Slapp’ (strategic litigation against public participation) suits as they form part of a pattern of conduct which has the ulterior purpose of discouraging, censoring, intimidating and silencing not only the defendants, but also members of civil society, the public and the media in relation to public criticism of Caruso and MRC.

Objections

In June, lawyers for Caruso and MRC filed “exceptions” (formal objections) to special pleas raised by the defendants arguing that Caruso and MRC were abusing court processes by using litigation to cause financial and other prejudice in order to silence opposition. The defendants also argued that their constitutional rights to freedom of expression were being violated.

The six defendants also argued that the defamation claims were “bad in law” because a company operating for profit cannot claim defamation and damages without proving that the allegedly defamatory statements are false, were made wilfully, and resulted in loss.

“We are asking the court to clarify and develop the law about when defamation proceedings can be struck out, if brought for an ulterior purpose,” says Odette Geldenhuys, attorney and partner at Webber Wentzel, which is representing the six defendants.

Western Cape Deputy Judge President Patricia Goliath has yet to deliver her findings in the exception and special pleas case.

The highest sum ever awarded in a South African defamation suit is believed to be R500 000.

Such an award was made to former tourism minister Derek Hanekom when he sued former president Jacob Zuma for alleging that he was an apartheid spy. Zuma appealed his loss in the KwaZulu-Natal High Court all the way to the Constitutional Court, which dismissed the appeal.

Former finance minister Trevor Manuel was also awarded R500 000 for defamation after the Economic Freedom Fighters (EFF) alleged that he was a business associate of Edward Kieswetter, who was appointed commissioner of the South African Revenue Service (Sars) last year.

Manuel headed up a selection panel to interview candidates for the commissioner post, though did not make the final decision. The EFF’s appeal against the decision was dismissed last year by Judge Elias Matojane of the South Gauteng High Court.

How Brazil and SA measure up in the corruption stakes

Written by Ciaran Ryan. Posted in Journalism

Brazil jailed its corrupt leaders. SA lets them walk. Then Brazil reformed its economy. From Moneyweb.

SA’s debt servicing costs as a percentage of gross tax revenue – frightening. Image: Shutterstock
SA’s debt servicing costs as a percentage of gross tax revenue – frightening. Image: Shutterstock

Brazil and SA lend themselves to comparison: both are resource-rich, struggling with inequalities and have a long history of corruption.

There are also some key differences. Brazil jailed corrupt politicians and officials, while no high level officials in SA face jail time for corruption, notwithstanding last week’s arrests of four government officials after an investigation into the R255 million asbestos audit project.

Read: Corruption arrests, land sales raise SA spirits

Former Brazilian president Dilma Rousseff was impeached in 2016 after investigations into state-owned petroleum company Petrobas, of which Rousseff had previously been chair, revealed massive bid rigging to inflate contract prices, with a portion of profits being funnelled back to politicians and state officials.

In 2018, another former Brazilian president, Lula da Silva, was jailed for 12 years for corruption and money laundering. It should be pointed out that both Lula and Rousseff denied the charges against them and claimed irregularities in the way their cases were handled, helped by media bias and opportunism by political opponents.

This begins to look rather like former president Jacob Zuma’s new-found contempt for the Zondo Commission of Inquiry into allegations of state capture, which he appointed and promised to assist.

He now wants Deputy Chief Justice Raymond Zondo to recuse himself for supposed bias after ordering the former president to appear before the commission in November to answer allegations of state capture.

Brazil’s swift and decisive action

Alistair MacDonald, institutional portfolio manager at Franklin Templeton Emerging Markets Equity, told the Morningstar Investment Conference last week that Brazil dealt swiftly and decisively with its corruption scandal, punished those involved, and then embarked on a series of reforms.

It relaxed labour laws, reformed the pension fund system, equalised private and public pensions, imposed more rigorous standards for state-owned company appointments, and introduced changes in its mining code, overseen by an independent regulator.Read: Lessons for SA from Brazil

Perhaps most importantly, it introduced a spending cap bill which limits government spending growth to last year’s inflation rate – which means in effect zero real growth.

SA’s reaction …

Contrast this with SA, where budget deficits are exploding and negotiations to reduce the public sector wage remain unresolved. The state wants to save R233 billion over the next two fiscal years, but this seems unrealistic.

Once Brazil had put its high-profile corruption cases to bed and introduced reforms, its economy took off like a rocket (after slumping badly in 2015).

SA’s reaction …

Contrast this with SA, where budget deficits are exploding and negotiations to reduce the public sector wage remain unresolved. The state wants to save R233 billion over the next two fiscal years, but this seems unrealistic.

Once Brazil had put its high-profile corruption cases to bed and introduced reforms, its economy stabilised (having slumped badly in 2015 and 2016).


Source: IMF

There should be a positive message in this for SA, but there seems little passion for pursuing high level politicians.

Big fish more likely to walk free

As political analyst Justice Malala told the Morningstar conference, smaller fish are likely to cop the blame for corruption while the bigger ones walk free.

If we were to follow the Brazil model, we would have to deal decisively with corruption at the top level and then embark on reforms needed to address the oncoming train of unemployment and spiralling debt.

MacDonald said there are some signs of prudence in the board appointments at state-owned entities (SOEs), but still little sign of improvement at larger SOEs such as Transnet, Eskom and SAA.

While Brazil decreased the local content requirement for equipment purchases for oil and gas exploration, SA has introduced no such reforms.

SA’s mining regulations still do not address investor concerns over domestic procurement and ownership. Labour laws in SA are seen as inflexible and anti-competitive, and the ruling party has little appetite to face down the trade unions.

Source: Franklin Templeton Capital Market Insights Group, Bloomberg, Factset

Perhaps the most frightening chart presented at the Morningstar conference is that of SA’s debt servicing costs as a percentage of gross tax revenue.

Interest is now absorbing twice the tax revenue of 2010 in percentage terms. This cannot go on.

SA has been shielded from deteriorating terms of trade by high precious metals prices for gold and platinum group metals. Oil exporting countries have been devastated.

Yet SA remains locked in the old economy of commodities and industry. Asian economies are embracing the new economy of cloud technology and ecommerce, which has now surpassed the old economy of mining and industry as a percentage of national income.

That’s true for most Asian countries. It’s not true for SA.

Asia now accounts for nearly 40% of global IT hardware and semiconductor revenue, and about 85% global IT services.

In other words, virtually every other emerging market in the world is showing us a clean pair of heels.

Source: Franklin Templeton Capital Market Insights Group, Bloomberg, Factset

Eskom gets tough with errant municipalities, grabs cash and land

Written by Ciaran Ryan. Posted in Journalism

As it scrambles to recover R31bn in municipal back bills – raising interesting questions about the land issue in the process. This article appeared in Moneyweb and The Citizen.

If a single municipality has 139 farms, it seems certain that the state has a surfeit of land for distribution to the poor. Image: Waldo Swiegers, Bloomberg
If a single municipality has 139 farms, it seems certain that the state has a surfeit of land for distribution to the poor. Image: Waldo Swiegers, Bloomberg

Eskom recently attached 139 farms worth R2.5 billion from Matjhabeng municipality in the Free State, signalling a new front in the war with delinquent municipalities.

Read: Eskom attaches 139 farms of FS municipal council

The electricity utility has been known to attach cars, computers and bank accounts in settlement of municipal arrears, but attaching farms as security for debts owed is something new.

As of July 31, municipalities owed Eskom R31 billion, with 80% of this owed by just 20 municipalities.

Asked what prompted the attachment of these farms, Eskom replied: “To collect this debt, Eskom is implementing the contractual conditions as per the supply agreement such as interrupting supply, pursuing legal avenues consistent with good credit management processes. So far, these 139 farms are the only property of this nature that Eskom is holding as security to cover unpaid debt.”

Farms valued at an average of R18m each

The farms were attached as security for Matjhabeng municipality’s R3.4 billion debt. The municipality values the farms at R2.5 billion, or R18 million each on average (bear in mind this is gold mining country, and includes the town of Welkom).

That should raise eyebrows for all sorts of reasons, and it has.

If just one bombed-out municipality has 139 farms it can hand over as security for a debt, how many such municipal farms are there scattered across the country?

That’s a question Leon Louw, executive director of the Free Market Foundation, wants answered: “What on earth is a municipality doing with 139 farms to give Eskom for debt security? That [Matjhabeng] has farms at all, let alone 139 farms, should generate a political and media outrage, yet the scandal went unnoticed.”

Expropriation without compensation pressures

Louw’s outrage is directed at the pressure to implement expropriation without compensation (EWC) on the pretext that the willing buyer/willing seller model has failed and more radical land redistribution is needed. “It appears that municipalities are sitting on vast tracts of superfluous land.

“If the Matjhabeng municipality’s 139 farms are indicative of the rest of the country, the government has ample land for redistribution.”

Moneyweb reported on Sunday (October 4) that government is about to auction off almost 900 vacant or underutilised state-owned farms across the country, a move aimed at helping those discriminated against during apartheid.

Read: Corruption arrests, land sales raise SA spirits

It begins to appear as if there is far more state-owned land available for redistribution than has hitherto been admitted.

Eskom says the Matjhabeng farms remain the property of the municipality until the dispute has been resolved in an outstanding court case.

Eskom – like municipalities – is under huge pressure to gather every cent owed to it and rein in ballooning arrears bills.

It explains the motivation for the land attachments: “Over the years Eskom has done everything within the company’s legal constraints to recoup unpaid debts from municipalities. In addition to pursuing the legal route with individual municipalities, such as the recent action against the Matjhabeng and Maluti-a-Phofung municipalities, Eskom is actively engaging stakeholders such as the National Treasury, SA Local Government Association and the Department of Cooperative Governance and Traditional Affairs (CoGTA) to improve the payments by municipalities.

Eskom’s priority

“Our priority is to ensure that municipalities are in a position to settle their current accounts timeously. Working with National Treasury, we are ensuring municipalities adopt funded budgets that include the payments to Eskom.

“Eskom has over the years implemented many concessions such as reduced interest rates and increased payment days to make it easier for municipalities to settle their accounts.”

Earlier this year Eskom attached the cash accounts of another Free State municipality, Maluti-a-Phofung (which includes the town of Harrismith), which had run up arrears of R5.3 billion after defaulting on its electricity bill. By order of court, Eskom released R90 million of the municipality’s seized cash, sufficient to pay workers.

Also earlier this year, it attached furniture, cars and other equipment in settlement of a R2.3 billion arrears bill owed by Emfuleni municipality, south of Johannesburg. This followed a 2018 court order interdicting Eskom from cutting electricity supply to the municipality as this would prejudice customers who faithfully paid their bills.

Large businesses in the area, such as ArcelorMittal and Growthpoint, have lobbied to keep the lights on by paying Eskom directly, rather than repurchase power from the hopelessly insolvent municipality.

Read:Eskom gets Sheriff to attach Emfuleni assets

Emfuleni: Eskom not half done taking municipality’s cars, furnitureEskom agrees to release funds to Free State defaulter

Residents of municipalities such as Govan Mbeki in Mpumalanga complain that they are being cut off by the municipality for up to eight hours a day, even though they are dutifully paying their bills. It’s the same complaint heard in many other parts of the country.

Eskom says it does not intend to punish paying customers but has no other option than to cut services to the defaulting municipality, which is mandated by the Public Finance Management Act and the Electricity Regulation Act.

“Interrupting of supply is a condition within the supply agreement Eskom has with its customers and is based on sound commercial law practice whereby a service is discontinued when non-payment for such service occurs,” says Eskom in reply to questions from Moneyweb.

Soweto residents ‘punished’

Residents of Soweto, which owes Eskom close to R18 billion, say they are punished when entire areas are disconnected, regardless of whether the individual customers have paid their bills.

King Sibiya, president of the Lungelo Lethu Human Rights Foundation, disputes the R18 billion arrears figure and wants it subject to independent audit. Power disconnections have led to social protests and vandalism of Eskom infrastructure in Soweto.

Sibiya wants an independent tribunal established to hear the individual merits of each complaint before deciding to disconnect power from people who are often living in desperate circumstances.

Eskom replies that all its tariffs are regulated by the National Energy Regulator, and it has no leeway to negotiate separate tariffs or have preferential arrangements outside of what is regulated. Relief is available through the so-called Inclining Block Tariff (IBT), which is a form of subsidy to low-consumption residential customers. Government also assists indigent households by providing Free Basic Electricity (FBE), a scheme that is administered by municipalities.

All users must pay

“In order to enable Eskom to sustainably and reliably supply electricity to the country, all consumers of electricity must pay for their consumption. Non-payment of electricity does not only affect the security of supply for paying customers, but it also contributes to increased energy and revenue losses coupled with increased operational costs,” says Eskom.

Eskom the best bet for an accurate land inventory?

If Eskom starts going after municipal-owned farms as it has just done in Matjhabeng, we may end up with a far more detailed inventory of state-owned land than has hitherto been the case.

If Matjhabeng has 139 farms, it seems certain that the state is squatting on a surfeit of land for distribution to the poor.

The supposed scarcity of land may be entirely manufactured by those with political ambitions.

Eskom may end up as a major landowner if more municipalities default, which may take some of the steam out of the push for EWC, which is far from a top priority for ordinary South Africans.

Says Louw: “Various ‘land audits’ supposedly document how much land is private, government, traditional, white, black or undefined. But they are all nonsense. Their common bizarre flaw is that they estimate land distribution by the most irrelevant criterion, area. ‘Whites own 80% of the land’ is an absurd popular refrain.

“Land by area implies that a hectare of desert is as valuable as a hectare of Clifton.”

Emfuleni and Midvaal enter the record books, but for very different reasons

Written by Ciaran Ryan. Posted in Journalism

The neighbouring municipalities are on distinctly different paths. From Moneyweb.

Midvaal has taken the high road, employing the best professionals for the job instead of making political appointments. Image: Getty Images
Midvaal has taken the high road, employing the best professionals for the job instead of making political appointments. Image: Getty Images

Emfuleni includes the towns of Vereeniging and Vanderbijlpark, while Midvaal extends from Alberton in the south of Johannesburg to the Vaal Dam and includes the town of Meyerton.

Emfuleni recently entered the legal record books after being slapped with a R492 million default judgment for breaches of contract for the installation of smart meters. This is par for the course for this municipality, where residents complain of raw sewage sloshing through the potholed streets and rubbish going uncollected for months.

Read: Emfuleni Local Municipality shames itself into the legal record books

Contrast this with neighbouring Midvaal, a smaller and more prosperous municipality – and one of the best run in the country, according to Ratings Afrika’s Municipal Financial Sustainability Index (MFSI) survey.

Midvaal’s executive mayor is Bongani Baloyi, who took on the role in 2013 at the age of 26. He is now 33 and something of a legend in mayoral circles, having signed off on six consecutive clean audits and built up reserves of more than R2 billion.

Midvaal is a DA stronghold and Baloyi has a reputation of zero tolerance for corruption.

Emfuleni is ANC-run and is often in the news, but usually for the wrong reasons – not least of all for failing to turn up at court to defend the R492 million claim over a contract gone sour.

Creating ‘the Dubai of southern Africa’

Baloyi plans to turn his corner of Gauteng into the Dubai of southern Africa, attracting businesses to the area with a potentially tantalising offer: cheap and abundant water and electricity.

Read: Two municipalities, both ANC-run, tell the story of where it all went wrong

“Businesses are attracted to municipalities that are well run and deliver good quality services,” says Ratings Afrika analyst Leon Claassen.

“Those that are able to sweeten that by showing a measure of energy independence from Eskom, and lower electricity tariffs, can expect to do even better. Quality of water and consistency of supply is another issue that concerns businesses.”

Read:Eskom gets Sheriff to attach Emfuleni assets (Mar 10)

Emfuleni: Eskom not half done taking municipality’s cars, furniture (Mar 11)

Midvaal is on the hunt for private sector partners to take over management of the distribution of electricity and roll out solar energy plants that will wean it off Eskom’s erratic supply, allowing it to offer cheaper energy than the rest of the country.

Another private-public partnership (PPP) will be inked later this year to recycle waste water and inject it back into the system, with surpluses being sold to Rand Water.

Independence

“The two issues that most concern businesses and residents in the area are electricity and water, and we realised some years ago we had to ensure we had some independence from both Eskom and Rand Water,” says Baloyi.

One of the key measures of municipal efficiency is the debtors’ collection rate: 92% at Midvaal, and about 75% at Emfuleni. That’s a huge difference, suggesting Midvaal’s residents are far more inclined to pay for services than their neighbours, based on their satisfaction with the overall quality of services delivered.

The Ratings Afrika MFSI survey takes a broad look at financial sustainability, measured around six components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development. Municipalities are then given a score out of 100.

Midvaal’s results are exemplary. Emfuleni’s are miserable.

The infrastructure development figures are particularly revealing, with Midvaal earning a Ratings Afrika score of 77 against 21 for Emfuleni.

What this tells us is that Midvaal is not just maintaining its infrastructure, but adding to it. In Emfuleni, just 1.6% of revenue goes into maintenance and repair of infrastructure, against 3.75% in Midvaal.

Source: Ratings Afrika Municipal Financial Sustainability Index survey

Midvaal’s residents are all too aware of the wreckage lurking across the fence in Emfuleni, where the ANC has ruled for decades.

What accounts for this startling difference between two neighbouring municipalities?

“I would say all I have done is my job, and I’ve avoided making political appointments,” says Baloyi.

“The law is very clear as to what is expected and you cannot use local government as a vehicle for political appointees. We employ the best professionals for the job, and I understand my role as gatekeeper against those who want to line their own pockets unlawfully.”

Baloyi’s suggestion for neighbouring Emfuleni?

“I think the rot is so deep that you have cut off a limb. You have to tackle corruption and wastage without mercy.”

He adds that poor service delivery feeds a culture of non-payment, which is very difficult to budge once established.

Outclassing the ruling party

The DA has made a point of outclassing the ruling party where it really counts, at local government level. This, says Claassen, is where governance is of most intimate concern to residents.

The Ratings Afrika survey shows the largely DA-run Western Cape comes out on top with an average MFSI score of 59, with the Free State floating to the bottom with a score of 21. The national average is 37 (or 31 if the Western Cape is excluded).

Midvaal has a much smaller population of 130 000, against Emfuleni’s 777 000. That’s not the only difference. Midvaal has consistently run operating surpluses, while Emfuleni has clocked up deficits of close to R2 billion for the three years to 2019.

In 2018, Auditor-General Kimi Makwetu pulled his staff out of Emfuleni when one of those conducting an audit was shot.

Later, the ANC asked Reverend Gift Moerane, Gauteng provincial secretary of the South African Council of Churches, to take over as mayor and try to clean the place up.

In what was perceived as a brazen case of political gerrymandering, the Municipal Demarcation Board attempted to merge the two municipalities in 2013 but agreement was reached to abandon the idea in 2015.

Midvaal residents have seen what lies across the fence, and they want no part of it.