It’s good to be a miner again

Written by Ciaran Ryan. Posted in Journalism

Commodity prices are surging. From Moneyweb.

Ore is loaded into the primary crusher at Kumba’s Kolomela Mine near Postmasburg in the Northern Cape Province. Iron ore prices have soared this year. Picture: Anglo American/Flickr

Ore is loaded into the primary crusher at Kumba’s Kolomela Mine near Postmasburg in the Northern Cape Province. Iron ore prices have soared this year. Picture: Anglo American/Flickr

The Brumadinho dam collapse in Brazil in January killed an estimated 300 people. It was caused by a tailings dam failure 9km away at the Córrego do Feijão iron ore mine, owned by Brazilian mining group Vale.

This was the second time in four years that Vale had been involved in a dam disaster. The previous one was in 2015 when the Mariana dam, also in Brazil, collapsed killing 19 people.

Mining groups worldwide started looking at their own tailings dams as potential disaster areas. The latest Vale disaster pulled 90 million tons of iron ore from the global market and sent iron ore prices soaring.

Just look at the share prices of Assore, Kumba, African Rainbow Minerals and Afrimat, all of which have substantial iron ore operations. Afrimat has grown turnover by an average of nearly 11% per year for the last four years, keeping its average cost of sales increase below this.

In mining, that’s a recipe for printing money.

Though listed in the JSE’s construction sector, it made a well-timed decision to diversify into iron ore mining several years ago.

Afrimat share price

Source: ShareMagic

Kumba’s share price is closely correlated to the iron price, which has been on a tear this year and is nearly back to levels last seen in 2013. Last week Kumba announced a drop of 11% in total production for the six months to June 2019, largely due to maintenance issues. That’s a luxury miners enjoy during times of rising commodity prices, though production recovered strongly in the last quarter. Kumba’s focus on higher margin sales is paying off handsomely, with export sales prices improving by about a third over the last year.

Read: Kumba increases earnings by 239%

Kumba share price

Source: ShareMagic

Amplats released its interim results for the first half of 2019 last week, with production holding steady over the same period last year. What really stands out is the 82% increase in its Ebitda (earnings before interest, taxes, depreciation and amortisation) to R12.4 billion. 

Read: Anglo posts 45% increase in earnings

Amplats share price

Source: ShareMagic

The same commodity price surge driving iron ore is also evident in platinum group metals (PGMs).

Peter Major, director of mining at Mergence Corporate Solutions, says Amplats’s results are surging in large part because of its decision to exit much of its underground production. The Mogalakwena mine produced 610 000 ounces in the first half of the year and is the world’s lowest cost producer, with a mouth-watering Ebitda margin of 57%. The comparable margin at Amandelbult was 26%. Amandelbult is in the throes of a turnaround programme that is now yielding decent returns: reserves and chrome recoveries were up roughly a third each for the first half of the year.

Despite an unprotected strike at the Mototolo operation that resulted in a 21% drop in output, Amplats recorded a 128% increase in headline earnings per share at the interim stage. Major points out that palladium now accounts for more than 40% of revenue, and this is starting to put platinum in the shade.

The lesson here is that open pit mining in SA has become more attractive and viable than underground mining.

“Government and the unions saw to that,” says Major. “Money goes where money is wanted. It’s a pity about the environmental destruction and massive drop in head count in open pit as compared to underground mining. But that seems to be what government and the unions have agreed is acceptable. So that is where all the investment and SA mineral production has gone to.”

This is Mining 101: cut your costs in the lean times, and enjoy the ride when the commodity cycle turns.

Source: Mergence Corporate Solutions

Source: Mergence Corporate Solutions

Congratulations, your mortgage arrears have been extinguished

Written by Ciaran Ryan. Posted in Journalism

It happened with last week’s interest rate change. SA’s banks disagree – but so did the Bank of Scotland before a court ruled against it. Logically, SA’s legal system should do the same. From Moneyweb.

The consolidation that happens with so-called payment holidays automatically takes place every time interest rates change – banks ‘write off’ arrear payments by spreading the arrears over the remaining term of the loan. Picture: Shutterstock

The consolidation that happens with so-called payment holidays automatically takes place every time interest rates change – banks ‘write off’ arrear payments by spreading the arrears over the remaining term of the loan. Picture: Shutterstock

Last week’s 0.25% per annum interest rate reduction extinguished the arrears on tens of thousands of mortgage bonds.

That’s the claim being made by several property owners in cases before the courts involving multiple banks.

“The banks no longer have a legal basis for continuing with debt enforcement proceedings – there are no longer any arrears,” says legal consultant Leonard Benjamin, who is advising in these cases. “Despite this, many consumers are still having to deal with the possibility of losing their homes. We will be arguing that the banks in question no longer have the right to pursue legal proceedings instituted against several of our clients.”

Read: Standard Bank accused of ‘double dipping’ in home repo case

Benjamin concedes the argument is controversial but is the only logical conclusion to draw from the evidence.

If the courts agree, it has massive implications for the banks.

Thousands of people who lost their homes through foreclosure over the last decade could then have a claim against the banks.

Read: Judges give banks a grilling over home repo practices

“The proposition is so startling that I appreciate that it may be difficult to understand. In fact, it seems that the banks themselves either don’t understand or choose to ignore that they are, in fact, extinguishing the arrears by changing the interest rate and our intention is to demonstrate this to them,” says Benjamin.

This argument is new to SA, but not overseas. A famous case in the UK in 2014, Rea versus Bank of Scotland, looked at exactly this practice and ruled against the bank, which was found to be consolidating the accounts of clients in arrears roughly every six months. That, said the court, had the effect of extinguishing any arrears.

All a customer has to do at that point is continue paying instalments.

To pay the arrears on top of this amounts to ‘double-dipping’ – or paying for the same thing twice.

Read: Are banks routinely overcharging on vehicle loans in arrears?

Now this argument is about to get a hearing in SA. Benjamin explains that many consumers will be familiar with ‘payment holidays’ – when the bank writes off the arrear bond payments to assist a consumer in financial distress.

Practically, the bank achieves the write-off by spreading the arrears over the remaining term of the loan, which results in an increase in the instalment and the purging of the arrears on the banks’ accounting systems.

Exactly the same thing happens each time interest rates change and banks adjust bond instalments. That has the effect of bringing the defaulting client up to date on the arrears.

Yet banks continue to hold the consumer liable for payment of the arrears, in addition to the adjusted instalment.

That’s where the double-dipping argument comes in, a practice so outrageous it’s a wonder it has taken this long to get before the courts.

“Because of the regularity of interest rate changes, it beggars belief how many consumers may have lost their homes on the basis of legal proceedings that were invalid,” says Benjamin.

The banks’ failure to write off arrears with the change in interest rates has another unfortunate outcome: the National Credit Act allows consumers to avert foreclosure and the sale of their homes at sheriff’s auctions (called ‘sale in execution’) by catching up any arrears before the date of property transfer to the new owner. This is commonly referred to as ‘reinstatement’ of the mortgage bond.       

“When the bank does not extinguish arrears over an extended period of time despite changes in the interest rates, the arrears mount up and consumers simply give up trying the defend any legal action by the bank. If the arrears claimed by the banks were accurate, I believe that many more consumers would be able to save their homes simply by paying the monthly instalment, without the pressure of trying also to make up arrears.” 

This is how it works:

Consumer A borrows R1 million from the bank at an interest rate of 10% pa, repayable over 20 years (240 months). Their basic monthly instalment will be R9 650.

In scenario 1, the consumer pays their instalments timeously.

In scenario 2, the consumer pays their instalments punctually for 20 months, then misses 10 payments. They have paid R193 000 but have arrears of R96 500 (R9 650 x 10).

In month 30, the interest rate drops from 10% pa to 9.5% pa.

In scenario 1, at the time of the rate change the consumer has paid R289 500 and the outstanding amount owing has been reduced to R957 002. The new instalment after the interest rate change will be R9 364. This means that over the next 210 months, the consumer will pay a further R1 966 440 to settle the loan. Altogether the consumer will have paid the bank an amount of R2 255 940 (R289 500 + R1 966 440).

In scenario 2, the outstanding amount has grown to R1 055 529, with arrears of R96 500. 

The new instalment will be R10 328 pm. The consumer will have to pay a further R2 168 800 to settle the bond. Altogether, they will have paid R2 361 880 (R193 000 + R2 168 800). If, in addition, the bank holds the consumer responsible for paying the arrears of R96 500, they will repay R2 458 380.  

Never mind policy, it is what happens

The banks are vigorously defending against claims of double-dipping, arguing in court papers that it is not their policy to consolidate the arrears when they change the interest rate. Benjamin rebuts this, saying it has nothing to do with policy.

“Consolidation occurs automatically because of changing the instalment. This fact cannot be ignored because it suits the banks. Holding the consumer liable for both the adjusted instalment and the arrears results in double-dipping, or over-recovery of the loan. 

“We are now very eager to have these cases argued in court, and hope that the banks want to use the opportunity to confirm that they are acting correctly.

“Our sense is that the banks will find it difficult to explain to the courts how they can consolidate arrears, but then continue to pursue their clients in court for an arrears amount that no longer exists.”

The double-dipping argument was aired in that 2014 Rea versus Bank of Scotland case. SA banks are making largely the same arguments previously shot down in the Bank of Scotland case: that they do not consider it to be a consolidation when they increase instalments, and are therefore entitled to continue claiming the arrears.

The UK court rejected the bank’s arguments and ruled in favour of the customers.

The judgment reads: “Consolidation is an objective fact: the arrears are either consolidated by being absorbed into increased contractual monthly instalments or they are not.” In other words, it has nothing to do with how the bank chose to deal with the arrears.

The judge ruled that banks cannot consolidate arrears and then recover the outstanding amount out of future monthly instalments, while at the same time approaching the courts for repossession orders (foreclosures) on the grounds that the client was in arrears.

Benjamin says consumers, whether they are in arrears or not, must be notified of the latest rate change within 30 business days, but recommends they get a copy of the notification from their bank without delay, particularly when they find themselves in arrears.

Read this article on Rea v Bank of Scotland for more information.

Tourism could reboot SA in no time at all; it’s time it was allowed to

Written by Ciaran Ryan. Posted in Journalism

It would take some minor changes, such as easier visa access. From Moneyweb.

Tourism’s contribution to the South African economy has been declining. Picture: Mike Hutchings, Reuters

Tourism’s contribution to the South African economy has been declining. Picture: Mike Hutchings, Reuters

With relatively little effort, tourism could add a percentage or two to economic growth. With a bit more effort it could add another percentage point or two on top of that. All it would require initially is making it easier for foreigners to get visas. Astonishingly simple, yet it hasn’t happened despite years of pounding on the doors at key government departments.

Part of the problem is that government doesn’t recognise tourism as an ‘industry’ in its own right, so it ends up a creature of bureaucratic inertia. The tourism infrastructure in SA is among the best in the world, and there is spare capacity. It needs hardly any new investment to add another million or two visitors to last year’s count of 10.7 million. Just make it easier for them to get in.

Read: Why tourism is the quick fix SA needs

President Cyril Ramaphosa wants to see a doubling in tourism arrivals to 21 million over the next decade. That’s eminently doable according to industry analysts. It would boost employment numbers by two million, and trigger downstream investment in manufacturing and agriculture to accommodate the need for additional buses, car, food, accommodation and the like.

Tourism worldwide accounts for roughly 10% of GDP, and 8.6% in SA. The SA figure should be around 12% or even 15%. Tourism’s contribution to the economy has grown impressively over the last two decades, but has been declining in recent years. In SA, the sector employs 726 000 directly, with a further 1.5 million employed indirectly in downstream services such as food supply, retail and security.

Read: The South African disaster: No businesses for the unemployed

Tourism’s potential to change the economic contours of the country has been discussed for decades, so why hasn’t it happened?

Grant Thornton prepared the graph below showing how tourism arrivals responded to key events such as the Soccer World Cup, the Cape Town drought and the introduction of tougher visa requirements for countries such as China.

Source: Grant Thornton (UBC: Unabridged birth certificate requirement for minors). Graph shows percentage growth or decline in arrivals.

It’s clear tourism is a victim of SA’s capacity for scoring own goals.

In the supposed interests of national security, former home affairs minister Malusi Gigaba in 2016 decided prospective visitors from countries such as China had to apply in person at our consulate offices in those countries. That wiped more than R1 billion from tourism revenues over the next six months. Those restrictions have since been eased, with nine visa processing centres opened in China. But still SA attracted just 90 000 from each of China and India last year – a fraction of what it could be with a more sensible visa programme.

SA barely features on the travel itinerary for Chinese travellers, who are expected to number 300 million by 2030. Since most countries fear being flooded with illegal immigrants from China and India, they too require visas for visitors from these countries – yet somehow manage to attract vastly greater numbers from these key outbound tourism markets. Last year Australia attracted 1.4 million Chinese visitors, all of them requiring visas, largely by making it easy to apply online in their own language.

SA’s rigid visa policy towards India and China is costing us billions of rands a year in lost revenue.

There has been some reprieve. Parents visiting SA are no longer required to carry birth certificates for their children, as was the case.

Opportunities

Another problem is that SA is a long-haul destination for moneyed tourists from North America, Europe and Asia. Yet one could say the same of Thailand, where tourism historically ranges as high as 17% of GDP, or Vietnam (9.4%). Other long-haul destinations are clearly doing some things to attract visitors that SA is not. Most of them offer low-cost charter packages covering flight and accommodation, something that SA has yet to fully exploit.

Consider that France attracted 90 million visitors last year, equivalent to 130% of its population. In the UK and Thailand, visitor numbers are equal to roughly 60% of their respective populations. The equivalent figure in SA is 18%.

A tourism growth strategy published by the Tourism Business Council outlines a number of steps that could radically reshape the sector. The easiest and most important of these is relaxing visa requirements by introducing electronic visa applications, expanding the visa waiver programme and recognising visas already issued to other destinations, such as the Schengen Area (26 European states), the US, UK, Australia and Canada.

Visa exemptions

Though SA is a member of the Brics bloc, visitors from Russia and Brazil are allowed entry without visas, but the same is not true for those from China and India. This is a major obstacle to increasing visitor numbers. Most of the top 10 tourism markets – including the US, UK, Germany, France, Netherlands, Brazil, Australia, Canada and southern African countries – are given visa exemptions. It has been proposed that the visa waiver programme be extended to a further 19 countries, and in fact seven of these were recently approved, including New Zealand, Saudi Arabia, Qatar, the United Arab Emirates, Cuba, Ghana, São Tomé and Principe.

Many of the remaining problems inhibiting faster tourism growth are regulatory. Some of the proposed changes will smooth the path for tour operators obtaining licences for vehicle registrations and renewals. It currently takes months for licences to be approved, and several tour operators have closed down as a result. Operators are required to provide black economic empowerment (BEE) certificates, proof of market demand and letters of support from the industry association. This unnecessary bureaucratic clutter is finally getting the attention it deserves, with a proposal on the table to set up a multi-departmental national tourism body to accredit operators and implement self-regulation.

While other countries have solved the issue of parents travelling with minors, Department of Home Affairs officials are not always aware of their own regulations and travel advisories that allow easier access for minors. Additional documentation should only be requested under suspicious circumstances, says Gillian Saunders, an independent tourism advisor. “The travel trade and IATA [International Air Transport Association] are still advising visitors to carry a birth certificate if only one parent or another adult is travelling with a child. They do not feel confident to push family travel yet,” she says.

‘Quick interim measure’

The recognition of Schengen, USA, UK, Canada and Australia visas for visitors to SA would serve as “a quick interim measure to improve access to SA for many nationals of visa-requiring countries who already hold valid visas from the above countries/areas”, adds Saunders. “And, if implemented, could continue.”

The Department of Tourism has started working on a China-ready strategy, and extra resources are being ploughed into dealing with Chinese visa applications.

Air transport policy is another issue that needs urgent overhaul. What is happening nationally is fragmented and inconsistent, and this is driving access to OR Tambo International Airport in an ad-hoc fashion. Cape Town International has achieved excellent air access, and King Shaka International in Durban is fairly active, but traffic to other centres is lagging far behind.

Given what is at stake, and the relative ease with which tourism could ignite a broader economic recovery, it is a wonder it has taken us this long to wake up to the obvious realities staring us in the face.

Source: Grant Thornton

Nuclear company burns through six CEOs and two chairmen in seven months

Written by Ciaran Ryan. Posted in Journalism

One CEO lasted a day, another a week. From Moneyweb.

Mines minister Gwede Mantashe (pictured) has the mess of his predecessor Jeff Radebe to ravage through. Picture: Moneyweb

Mines minister Gwede Mantashe (pictured) has the mess of his predecessor Jeff Radebe to ravage through. Picture: Moneyweb

Mines minister Gwede Mantashe has had energy added to his portfolio as part of President Cyril Ramaphosa’s cabinet downsizing.

He’s got his work cut out for him, having been handed a hospital pass by his predecessor as energy minister, Jeff Radebe, the president’s brother-in-law.

One of Mantashe’s first jobs, no doubt, will be to steady the chaotic South African Nuclear Energy Corporation (Necsa), which has burned through six CEOs and two chairmen in seven months. The company is wracked by governance lapses and no less than three shutdowns of its medical isotopes plant in less than two years – all over safety forms incorrectly completed.

Read: SA’s nuclear reactor shut down – again

This week, speaking at a Nuclear Science and Technology gathering in Sandton, Mantashe berated the National Nuclear Regulator for shutting down the reactor under “suspicious” circumstances. The company was losing customers and competitive advantage built up over 20 years because of the shutdown.

Read: Nuclear chair resigns as governance crisis boils on

Moneyweb understands that Necsa’s chief legal advisor Vusi Malebana is under threat of disciplinary proceedings for a letter he wrote to the board highlighting several crucial and potentially costly governance and legal lapses that ended up being leaked to the press.

According to trade union Nehawu (National Education, Health and Allied Workers’ Union), the trouble started when Radebe last year suspended three members of the board on the grounds of “defiance and ineptitude”. They were chairman Kelvin Kemm, CEO Phumzile Tshelane and finance director Pamela Bosman. The three are challenging their suspensions in the Pretoria High Court.

Read: Axed Necsa board blames resistance of ‘privatisation by stealth’ for dismissal

In apparent breach of the Necsa Act, Radebe immediately appointed Rob Adam as the replacement chairman, and Don Robertson as acting CEO. That was seven months ago. Both men have now left.

The once-profitable state-owned enterprise under the previous board is now a financial wreck, asking parliament for a R500 million bailout.

Nehawu is calling for the removal of the entire Necsa board, as well as Necsa subsidiary NTP Radioisotopes MD Tina Eboka. The union says plans have been hatched to retrench 400 workers without proper consultation. Last week it was granted the right to launch a protected strike.

Robertson had been brought out of retirement to replace Tshelane at the helm of the highly sensitive nuclear company in December last year.

The following appointments as acting CEO have been variously announced and/or retracted since Robertson left:

  • Alan Carolissen (whose appointment was aborted before it began and which, according to the company’s legal advisor, now exposes it to a potential financial claim);
  • Monde Mondi (head of human resources, who lasted seven days as acting CEO);
  • Gavin Ball, who barely warmed the seat before making way for:
  • Ayanda Myoli, who assumed the acting CEO post on July 8 and will likely remain there until further notice.

Both Robertson and Adam managed to antagonise labour when rumours of staff retrenchments started swirling. There was also talk of selling off some of the subsidiary companies as part of a turnaround plan.

Mantashe appears to have spiked at least some of these plans. In his budget speech last week he referenced NTP Radioisotopes, the Necsa subsidiary that leads the world in the production of medical isotopes for the treatment of cancer. The shutdown of the plant by the nuclear regulator that produces this medicine “resulted in the loss in market share, which will take a long time to regain”.

‘Leaders have a duty’

“This led to erratic production until July 2018, a problem that is now resolved, since the NTP developed a Plant Reconstitution Plan which was submitted to the NNR [National Nuclear Regulator],” said Mantashe. “Where you are a leader you have duty to protect market share and competitive advantage.”

Another subsidiary that was also rumoured to be up for sale as part of the turnaround programme is Pelchem, a world leader in producing fluorochemicals that are used in making a variety of consumer products such as high octane fuel, anaesthetics and mobile phones. Any talk of selling this company appears to have ended with the departure of Robertson and Adam.

Mantashe sees a bright future for Pelchem, working together with state-owned mining company Mintek. “We must ensure a sustainable and self-sufficient Pelchem,” he said last week.

How the accountants broke capitalism

Written by Ciaran Ryan. Posted in Journalism

SA is not alone – it’s a global phenomenon. This article first appeared in Moneyweb and Accounting Weekly.

The Big Four have become consulting firms with auditing sidelines, and their revenue growth – in good times and bad – is astonishing. Image: Moneyweb

The Big Four have become consulting firms with auditing sidelines, and their revenue growth – in good times and bad – is astonishing. Image: Moneyweb

We are programmed to regard accountants with reverence and unquestioning trust. They are the record keepers of the economy and arbiters of financial truth.

Double-entry bookkeeping was an astounding development. It allowed business owners to record assets and liabilities rather than simply track the movement of cash and goods. It introduced the concept of ‘capital’ to the business world centuries before Karl Marx wrote Das Kapital. With this new insight, business owners could accurately reflect profits, which in turn opened up opportunities for outside investors.

Just as astounding is the rise of the Big Four accounting firms – EY, PwC, Deloitte and KPMG – as business titans equal to or even mightier than their clients. The Big Four audit 97% of US public companies, 100% of the UK’s top companies and 80% of Japanese-listed companies. Not to mention their overwhelming representation among the JSE’s top companies. Yet trust in the accounting profession has seldom been lower.

Read: Just who does a company auditor really serve?

Richard Brooks – author of Bean Counters: The Triumph of the Accountants and How They Broke Capitalism – details why this trust has slipped, and how a nicely balanced set of figures can often be a fraudster’s friend.

The major accounting firms have managed to avoid the scrutiny that their importance warrants. Perhaps, as Brooks advises, we should force them to open their financial statements to public scrutiny so we can see how they earn their money.

Before the Big Four there were the Big Five – Arthur Andersen & Co having disappeared in a puff of smoke after it cooked up false accounts for the now defunct US energy company Enron.

A mandatory 10-year audit rotation is the latest solution to this overwhelming concentration and the inevitable Stockholm syndrome that comes from having auditors sleep with the same client, year after year. Consider that KPMG counted General Electric as a 106-year-old client and PwC stepped down from the Barclays audit in 2016 after 120 years. It hardly needs pointing out that given enough time, the Big Four (if they are still around in 10 years, which is a pretty safe bet) will eventually cycle back to the clients who rotated them out of their engagements.

Accounting regulators are working overtime to keep up with the schemes being hatched to boost revenue (think Tongaat) or hide liabilities (Steinhoff). Given enough accounting scandals, and we surely have enough of those, investors will start to apply a ‘truth discount’ on all public companies’ figures.

It would be foolhardy to count on the regulators to bring sanity to the profession. As Brooks points out, the accounting standard-setters are swimming in alumni from the Big Four, ensuring that the rules are crafted to suit the major accounting firms and their clients. If you are a major company, you cannot stray very far from one of the Big Four, despite the efforts of the Independent Regulatory Board for Auditors (Irba) to transform the sector and introduce co-audits for black firms.

Every crisis is a revenue opportunity

What is astonishing is the growth in revenue of the Big Four firms through good times and bad. Brooks demonstrates that their revenue growth barely paused for breath during the 2008/9 financial collapse. Every crisis, or indeed change, is a revenue opportunity for these firms: Y2K, climate change, cyber security, corporate governance, business restructuring and integrated reporting. You name it, they have a solution for you. The result is sports-star-level incomes for men and women employing no special talent and taking no personal or entrepreneurial risk.

Worldwide, these firms make just 39% of their income from audit. They have become consulting firms with auditing sidelines. Though these firms will swear that auditing and getting the numbers right is the sacrosanct heart of their business, the evidence suggests otherwise. With so many inadequate audits on their own ledgers, one might expect a dip in their earnings. You would be wrong. Poor performance is not a matter of life and death when there are so few competitors from which to choose.

Their own key performance indicators (KPIs) emphasise revenue growth, profit margin and staff satisfaction, rather than exposing false accounting, fraud, tax evasion and the systemic risk these pose to the economies they operate in.

The demise of sound accounting became a critical cause of the early-21st-century financial crisis, says Bean Counters. The tendency is to blame reckless banking practices for the last financial collapse, but far less attention is given to the accountants who signed off on dud loan books.

Books sanctified by ‘magic’

Vincent Daniel was a disaffected former Arthur Andersen accountant employed by Steve Eisman, depicted in the film The Big Short. In just a few months, Daniel came to the conclusion that the subprime mortgage loans being dished out by the major banks suffered exceptionally high delinquency rates. He saw what the major accounting firms had apparently missed or ignored. Eisman and several other short sellers made fortunes predicting the subprime crisis – yet the banks’ books, sanctified by the magic of mark-to-market accounting, pretended nothing was amiss. Millions of people were impoverished by the willful negligence of the accounting firms.

That’s what happens when accountants go rogue.

Undeterred, the Big Four raced off to India and China to capitalise on the record-breaking growth in these zones. The Bean Counters details how the same lapses in oversight started to appear in these new markets. Deloitte was forced to resign from two important clients after signing off on vastly inflated profit figures. Again, it was the short-sellers who highlighted these anomalies. PwC was fined by US authorities for a deficient audit at Indian IT company Satyam. In one country after another, each of the Big Four has been sanctioned, fined and worse for turning a blind eye to fraud, corruption or fake accounting.

Operating with impunity

Despite the economic wreckage caused by accounting firms, they operate with relative impunity. “Even before Enron, the big firms had persuaded governments that litigation against them was an existential threat,” writes Brooks. “They should therefore be allowed to operate with limited liability, suable only to the extent of the modest funds their partners invested in their firms rather than all their personal wealth.”

Perhaps even more troubling is the fact that governments turn to these accountants for advice on tax, finance, trade and other issues.

Complexity is always a money-making opportunity for these accountants, and the rules they craft in the ‘national interest’ are often serving another master entirely.

Are these the right people to be guiding national policy?

Blatant corruption in accounting is the exception. The real problem is the profession’s “unique privileges and conflicts that distil ordinary human foibles into less criminal but equally corrosive practice,” says Brooks.

For years there has been talk of breaking up the Big Four, and detaching their audit operations from their consulting arms. It happened after Enron and it’s happening again now. The accounting firms concede the need for reform, but never to the point of threatening their fee-earning capacities.

One possible solution is to have an independent body appoint auditors, rather than allowing clients to make their own choices. After all, auditors are there to perform a public oversight function that goes far beyond the interests of management and shareholders.

Audit rotation will certainly help. But the only real long-term solution is to reintroduce a questioning, objective and sceptical mindset to the business of accounting and auditing.

Nuclear chair resigns as governance crisis boils on

Written by Ciaran Ryan. Posted in Journalism

Necsa chairman Rob Adam, who served jail time for anti-apartheid activities in the 1980s, falls on his sword. From Moneyweb.

Signs prohibit entry to the Koeberg nuclear power plant near Cape Town in this 2015 file photo. Picture: Reuters/Mike Hutchings

Signs prohibit entry to the Koeberg nuclear power plant near Cape Town in this 2015 file photo. Picture: Reuters/Mike Hutchings

The goings-on at the Nuclear Energy Corporation of SA (Necsa) over the last two years seem incomprehensible even to people who work there.

Read: Sack the Necsa board before it wrecks the company – union

Moneyweb has learned that chairman Rob Adam, who replaced suspended chairman Dr Kelvin Kemm barely six months ago at the insistence of former energy minister Jeff Radebe, has resigned his position.

He resigned on Thursday (July 4) with immediate effect, stating that his “full time work as MD of the South African Radio Astronomy Observatory means that I am unable to give the Necsa role the attention it deserves.”

Others in the company believe the reason is more likely to do with governance issues highlighted in an internal Necsa document which was passed on to Moneyweb. Curiously, Adam served 10 years in jail for anti-apartheid activities in the 1980s. He later ended up at the top of the country’s sole nuclear company.

His resignation has been welcomed by labour, which regarded Adam’s appointment as irregular and illegal. He is also regarded as one of the architects of a plan to axe 400 staff at the nuclear company.

Read: Fight between energy minister and nuclear company board gets nasty

An internal document from Necsa’s chief legal advisor Vusi Malebana – addressed to the minister, the Necsa board and the director-general of energy – highlights numerous governance and legal breaches by the company:

  • The company’s auditors (EY) were improperly appointed, and audit fees of R10 million (compared to the previous year’s R5 million) are likely to escalate despite there being no appointment letter authorising the commencement of services. “Necsa has exposed itself to an irregular expenditure finding or litigation to pay audit fees,” says Malebana’s letter. The auditor-general is responsible for auditing state-owned companies, but often sub-contracts outside companies to conduct specific tasks.
  • The appointment of an acting CEO by Radebe violates the Nuclear Energy Act. Only Necsa employees may assume this position. Three acting CEOs have been appointed in a matter of months. Gavin Ball is supposed to take over as acting CEO on Monday (July 8). This too violates the act as he is an employee of NTP Radioisotopes, a subsidiary of Necsa. Necsa has also exposed itself to potential liability over the aborted appointment of Alan Carolissen as acting CEO.
  • A turnaround strategy plan for the company envisages laying off 400 workers. This was submitted to the Department of Energy without consulting Necsa’s executive committee (exco) and in violation of Section 189 of the Labour Relations Act, which demands consultation with workers and unions if any retrenchments are contemplated. This turnaround strategy was withheld even from Necsa’s exco. “As a form of courtesy the board should have at least sought input from the Necsa exco as a sign of good corporate governance,” says the internal document.
  • The board started advertising for the Necsa CEO position without briefing the minister, whose job it is to appoint the CEO. This was done knowing full well that suspended CEO Phumzile Tshelane is challenging his 2018 dismissal in court where “the board-appointed MNS Attorneys have as much as conceded that the case against the former CEO [Tshelane] is weak at best. Continuing with a process to fill a post without ministerial blessing in the face of a possible adverse CCMA finding exposes Necsa to huge financial risks.”
  • The legal advisor also says it is doubtful whether Necsa has adequate insurance cover in place, “if at all”. “The board is hereby advised to inform National Treasury and the minister of this risk as it will be the South African Government which will have to stand good for any potential nuclear liability should such an occurrence materialise.”

Read: SA’s nuclear reactor shut down – again

The radiochemical plant which produces life-saving medical isotopes that are shipped to more than 60 countries around the world, has been shut down three times in 18 months for safety lapses which are really lapses in paperwork. The plant was shut down for months by the nuclear regulator because the paperwork was not in order. That has cost the company R3,5 million a day in lost sales and has ravaged the financials of a once model state-owned company that two years ago made a R300 million profit, but is now asking parliament for a R500 million bailout.

Trade union Nehawu (National Education, Health and Allied Workers’ Union) says this crisis was manufactured by Radebe, whose portfolio has now been taken over by mines minister Gwede Mantashe. Radebe interfered in the running of the company and suspended the previous board for “defiance and ineptitude”. Few at Necsa believe any of this.

“The real problem started when the former minister of energy Jeff Radebe interfered in the running of what was a great and profitable company,” says Zolani Masoleng, Nehawu branch chairperson at Necsa.

“He suspended the previous board for no good reason. We now have confirmation that Necsa was planning to lay off 400 workers which is what we suspected all along. Before this company is wrecked completely we are calling for the removal of the current Necsa board, as well as Tina Eboka [MD of the subsidiary NTP, which produces the medical isotopes].”

The suspended directors – former chairman Dr Kelvin Kemm, former CEO Phumzile Tshelane and director Pamela Bosman – are challenging Radebe’s decision in court.

Ciaran Ryan on SAFm: Court stops banks from taking money out of your account without permission

Written by Ciaran Ryan. Posted in Uncategorized

Ciaran Ryan talks to Nompu Siziba on SAFm about the court judgment handed down last week preventing banks from taking money out of your account in settlement of debts owed to it – a practice known as “set-off”. Billions of rands are potentially lifted from clients’ accounts each month due to the banks’ self-serving interpretation of the law.

Billions in mining royalties intended for the poor squandered, stolen or diverted

Written by Ciaran Ryan. Posted in Journalism

Corruption Watch report finds revised Mining Charter isn’t working. From Groundup.

Photo of a mine

Mining in Mpumalanga. Archive photo: Mpumalanga Tourism & Parks Agency

Billions in mining royalties intended to uplift poor communities are potentially being squandered, stolen or diverted due to in-fighting and maladministration of these funds.

That’s the conclusion of Mmashudu Masutha and Deborah Mutemwa-Tumbo, authors of Corruption Watch’s Mining Royalties Research Report 2018, which examined communities in Limpopo and North West provinces and found that the payment of royalties to affected communities was mired in “greed, competition for a finite financial resource, deliberate exploitation, mismanagement of funds and resources, poor administrative oversight and a lack of will, accountability and commitment on various levels to repair and transform the pay-out of mining royalties.”

One of the aims of the Mineral and Petroleum Resources Development Act (MPRDA), which came into effect in 2004, was to uplift poor communities whose land was being used for mining. The Act makes provision for lease agreements between mines and mining communities, who are to receive royalties for these leases.

The MPRDA recognises two forms of royalties: “state royalties” payable by mines to the government, and “contractual royalties” payable by mining companies to the owners of the land.

A revised Mining Charter was gazetted in September 2018, requiring companies applying for new mining rights to achieve a 30% black shareholding, of which 5% must be held by a community trust.

Corruption Watch says in its report: “This revised Charter has come under fire from the likes of Mining Affected Communities United in Action (MACUA), a body said to represent over 200 communities across the country’s nine provinces. They have called the consultation processes with the Department of Mineral Resources (DMR) a farce and also outlined shortcomings in the Charter that don’t allow communities to determine how benefits and development projects will be carried out.”

Elton Thobejan, chairperson of the Sekhukhune Combined Mining Affected Communities (SCMAC) in Limpopo, says many of the disagreements over mining royalties stem from traditional leaders entering agreements with the mining companies without the participation of the intended communities.

“These agreements are often deemed confidential to prevent communities’ access to information. Some of the royalties are paid to the traditional and municipal authorities not necessarily to enhance service delivery but to buy a favour in order to keep on suppressing mining communities on economic and social benefits.”

In most instances the involvement of the traditional leadership is problematic particularly the chiefs, in that those who are supposed to benefit from the royalties are scared to challenge them and could end up being sidelined from the entire community. The chiefs collude with the police and the local municipality to victimise those who are determined to ensure that the community trusts are administered correctly and everyone is treated fairly, adds Thobejan.

The Mampa Serole Community in Limpopo, one of the communities being monitored by SCMAC, is currently split in two factions, says Thobejan. “The situation is deadly because they are attacking those who are revolting against the mine in an effort to hold authorities and the trustees accountable.”

Mining royalties paid to communities who own the land are dispensed in one of two ways – either directly into a D (or development) account, or by the conversion of royalties into equity in the mining companies.

James Wellstead, senior vice president of investor relations at Sibanye-Stillwater, said mining royalties paid by the company are collected by the SA Revenue Service (SARS) and are then routed into the National Revenue Fund, managed by Treasury. The royalties are based on agreements with various tribal authorities and local governments. “We don’t really monitor what they do with these funds,” said Wellstead.

Sven Lunsche, vice-president of corporate affairs at Goldfields, said, “As you know our mining royalty payments aren’t ringfenced – as we would certainly prefer them to be – but go into the deep black hole that is SARS.”

Corruption Watch reports that community engagements over two Anglo Platinum projects – GaPhasha and Booysendal – were marked by a deep level of tension and threats among community members. “Many were frightened to go on record to speak about what they consider collusion between traditional authorities and mining companies. There was a general reluctance to take part in the research and a degree of hostility directed at researchers. Community members said they were frustrated and tired of taking part in forums and engagements with little benefit to them or little prospect of changing their current situation.”

It’s a story that seems to be repeated across the country, and Corruption Watch’s findings are echoed by the Bench Marks Foundation, which monitors corporate behaviour as it affects human rights and the environment.

“Talk about trust funds is meaningless for communities,” said Chairman Bishop Jo Seoka in a statement to the Bench Marks Foundation annual conference in 2018. ”We all know that communities simply don’t trust tribal and local authorities to deal with trusts in a way that benefits the people they are intended for.

“So, as far as the Mining Charter is concerned, it has really been a non-event for mining communities this year.”

Corruption Watch is urging more transparency and a stronger, more enforceable form of accountability from mining companies with regards to the royalty agreements that they enter into with communities, and other aspects of their engagement with mine affected communities.

“This especially concerns withheld funds and includes, but is not limited to, record-keeping of the funds, access to information regarding the funds, community consultation on all relevant decisions on the funds held, requirements for the release of the funds, and assistance from the mining company in moving towards release of the funds.”

Corruption Watch says what’s needed is for traditional leadership bodies to be properly empowered and accountable to their communities. Like mining companies, they should be required to present audited financial statements and reports on a regular basis to communities and make them available for public scrutiny. Council leaders should declare their interests in any deals being considered. Traditional leaders should appoint experienced and skilled advisors to help them navigate through sometimes complex business dealings, with councils represented 50-50 by community elected members and traditional authorities.

Court rules banks can no longer grab money out of your account

Written by Ciaran Ryan. Posted in Journalism

Without your permission. This article first appeared in Moneyweb.

The case highlighted some devious practices by banks that will no longer be tolerated. Picture: Reuters

The case highlighted some devious practices by banks that will no longer be tolerated. Picture: Reuters

It is no longer legal for a bank to grab money out of your account in settlement of debts falling under the National Credit Act (NCA) unless you specifically authorise it.

That was the outcome of a court case in the South Gauteng High Court last week initiated by the National Credit Regulator (NCR) against Standard Bank.

Judge Raylene Keightley found in favour of the NCR, which was joined by the SA Human Rights Commission (SAHRC) as a friend of the court.

Read: Landmark court case seeks to stop over-charging by creditors

The practice of ‘set-off’ has long been a part of common law. It meant that if you owed the bank money, say because you were behind on your mortgage bond, the bank was within its rights to grab money out of your account as soon as funds appeared in the account. And it could grab any amount it considered validly due to it – including legal costs and admin fees. The borrower was then left to argue this with the bank after the fact.

The problem with this is that it privileged the banks above other creditors, and often left the debtor with no money to cover essentials such as food and lights. That brings in Constitutional issues such as rights to property and dignity.

When the NCA came into force in 2007, it determined very specific conditions under which set-off could be applied. These new set-off rules were much more in favour of the consumer. The debtor must authorise the payment, and funds are required to be deposited specifically for the purpose of settling the debt. The bank is also required to notify the debtor of its intention to deduct funds from the account.

The common law principle of set-off was so weighted in favour of the banks that they could deduct funds without notice from your account, and without giving you an opportunity to query it. What often happens in practice is that legal and other unauthorised amounts are deducted in addition to the debt instalment. Debtors could challenge this in court, but very few did because of the outrageous costs of taking on deep-pocketed banks in litigation.

It is little wonder that the banks, presented with two possible legal interpretations of set-off, chose the one most favourable to themselves – the common law principle.

Standard Bank’s argument 

Standard Bank argued that common law set-off was an important tool for debt recovery and considered it as part of its security when granting a loan.

The case highlights some devious practices by the banks: their credit agreements used to include clauses on how they would go about applying set-off, but in more recent years their agreements went silent on the subject. By remaining silent on set-off in their credit agreements, they were able to rely on the common law interpretation of set-off and carry on grabbing money out of customers’ accounts as before.

The NCR argued that if this was allowed to continue, it meant the NCA was of no force whatsoever when it came to curbing the abuses of set-off.

Concept of debt review undermined

The NCR and the SAHRC argued that Standard Bank’s interpretation of the NCA undermined debt review, which allows an over-indebted person to apply to court for a rescheduling of debt repayments. A debt counsellor, in an affidavit in support of the SAHRC, deposed that banks continue to practice set-off, even when customers are under debt review. This has a crippling effect on the debtor, as set-off is almost always done without notifying or interacting with the account holder. It often means consumers are unable to meet their repayment obligations to other creditors, and where children are involved, there may be insufficient funds for school fees and basic necessities.

The bank argued that the NCA’s set-off provisions only applied if set-off was expressly included in a credit agreement, but the judge kicked this argument to touch.

The bank is perfectly happy to keep consumers in the dark by keeping any mention of set-off out of their credit agreements, yet expects to rely on common law set-off (which is far less favourable to the consumer) when it comes to recovering their debts.

This, the court found, was subversive of the NCA’s aim of “addressing and correcting imbalances in negotiating power between consumers and credit providers by … providing consumers with protection from deception, and from unfair conduct by credit providers …”

“The judgment has provided the much-needed clarity on the position in law and marks the end to a destructive practice wherein set-off is often times applied without any notice to, or interaction with, the consumer,” said the SAHRC in a statement in response to the court ruling.

The judgment says “the common law right to set-off is not applicable in respect of credit agreements with are subject to the National Credit Act.”

Costs were awarded against Standard Bank.

New Zim dollar triggers horror memories of hyper-inflation

Written by Ciaran Ryan. Posted in Journalism

It comes with a hike in short-term interest rates to 50% to curb inflation of 100%. This article first appeared in Moneyweb.

Although described as a ‘knee-jerk’ policy introduced in ‘the dead of night’, the exchange rate improvement of 11 Zim dollars to one US dollar this week (from 14 earlier this month) is perhaps an early sign that the measures are working. Picture: Waldo Swiegers, Bloomberg

Although described as a ‘knee-jerk’ policy introduced in ‘the dead of night’, the exchange rate improvement of 11 Zim dollars to one US dollar this week (from 14 earlier this month) is perhaps an early sign that the measures are working. Picture: Waldo Swiegers, Bloomberg

Zimbabwe banned the use of foreign currencies this week, demanding that businesses accept only local currency.

This has triggered fears of a return to Robert Mugabe-era inflation, which peaked at over a million percent. That was brought to a sudden end in 2013 when the country allowed trading in foreign currencies, and inflation dropped virtually overnight to under 10%. The decision to allow trade in US dollars, South African rands and Botswana pula was widely credited for stabilising the country’s shambolic economy. The collapse was primarily driven by a massive fiscal deficit and the reckless printing of money by the Reserve Bank of Zimbabwe (RBZ).

Read: Zimbabwe inflation hits 50% as Zanu-PF big-wigs milk crisis

Yesterday the so-called Real Time Gross Settlement (RTGS) dollar strengthened to 11 to the US dollar from a low of 14 earlier in the week, according to some reports. Economist Eddie Cross, one of the architects of the new financial regulations and a former Movement for Democratic Change (MDC) parliamentarian, says the new measures are aimed at reducing the RTGS dollar to around four to the US dollar. That should also bring inflation down from its current level of about 100%.

Read: Zimbabwe declares interim RTGS dollar its sole legal currency

It was this spiralling inflation, and the inability of ordinary Zimbabweans to survive in a country where hard currency became the preferred legal tender, that prompted the sudden move. Most Zimbabweans struggled to lay their hands on US dollars and rands.

Several measures were announced: the formation of a monetary policy committee similar to that of the SA Reserve Bank to make decisions on interest rates; an increase in short-term lending rates from 17% to 50%; and an increase in forex for trade on the inter-bank market.

Curbing forex opportunists

One of the purposes of these measures is to reduce the massive arbitrage opportunities available to those with access to foreign currency. Because the price of fuel is controlled at Z$3.50 a litre by the state, more than 2 000 heavy duty fuel trucks enter Zimbabwe every day to transit the country to states to the north and east, using the low fuel prices to fill their tanks.

It is reckoned that 2-3 million litres of diesel is being shipped out of Zimbabwe each day because of this pricing gap.

Fuel can be purchased in Zimbabwe for the equivalent of US$0.20 a litre and sold in Botswana for the equivalent of US$1.30 a litre – an easy path to quick riches for thousands of truck owners.

Read: Back to 2008 in Zimbabwe as currency that wrecked lives returns

“Many people were borrowing local currency at 17% so they could engage in these arbitrage opportunities, but this had the effect of driving up prices for everybody else,” says Cross. “By hiking short-term interest rates to 50%, this makes it far less attractive for arbitrage. This should result in lower inflation across the board over the next few months. I think these measures are a step in the right direction, and we should see the parallel market rates for the RTGS dollar continue to strengthen.”

In February this year finance minister Mthuli Ncube instructed the RBZ to set up an inter-bank market for forex. The reserve bank resisted the instruction until President Emmerson Mnangagwa stepped in and insisted that the bank adhere to the Short Term Stabilisation Programme that had been adopted in 2018.

Tax threshold may be raised to offset the effects

The resurgence of inflation to 100% – though far less frightening than had been the case prior to 2008 – makes it increasingly difficult for families to survive. One of the measures being considered is to raise the threshold for paying income tax from RTGS$500 to RTGS$2 000, which would compensate for the effects of inflation.

Despite the rise in inflation in recent months, Zimbabwe has accumulated forex reserves of about US$1 billion and a fiscal surplus of US$2 billion.

Companies are required to remit 55% of forex earnings to the RBZ, amounting to about US$3 billion a year. Half of these retentions will now be made available on the inter-bank market as part of the package of stabilisation measures.

The RTGS was de-linked from the US dollar in September 2018, after which the exchange rate fell from RTGS$4:US$1 to 14:1 earlier this month. The improvement this week to 11:1 is perhaps an early sign that the measures are working.

‘A plan to hoover up forex’ from business

Other Zimbabweans are not so convinced. James Chidakwa, an opposition MDC member of parliament, says there are suspicions that this is a plan by the RBZ to hoover up all the forex from businesses.

“It will all end in tears for the rest of the people,” he says. “Not so long ago Ncube was asked what we should do about traders who ask for US dollars. His response was that it was perfectly legal for them to do so because we’re in a multi-currency economy.

“We have a two-headed beast running the country. How do businesses price their goods and services let alone replenish their goods?

“Another round of price madness has effectively been promoted. As MPs we are sandbagged with these people [those who run the country’s finances]. Ncube does not know what he is doing. This also reflects badly on the president’s judgement, by hiring someone who failed to run a bank [Ncube was chief economist and vice president of the African Development Bank] to turn around a failed state’s economy.”

The MDC yesterday said the new measures amount to the reintroduction of the dreaded Zim dollar, without addressing the economic fundamentals to support the local currency.

‘Nation ambushed’

“Despite government’s promise that it would introduce a new Zimbabwe currency in the next nine months while it addresses the fundamentals, the regime today just ambushed the nation and reintroduced the Zimbabwean dollar as the only legal tender in local transactions,” said Luke Tamborinyoka, MDC deputy national spokesperson.

“This means that the multi-currency regime, which provided some modicum of decency and predictability, has been thrown out of the window in favour of the volatile local currency that is not backed by adequate gold and foreign currency reserves.”

The trust and confidence that are vital to public willingness to transact in a new currency are not present.

“It remains to be seen how the market will respond to the madness, but the knee-jerk monetary policy introduced in the dead of the night is reminiscent of the rushed decisions of this regime,” said Tamborinyoka.

“The fuel price increases announced by Mnangagwa himself in the dead of night and that caused a furore in the country’s economy are a case in point.”