British American Tobacco asked to come clean on spying allegations

Written by Ciaran Ryan. Posted in Journalism

It has been served an access to information request by smaller players. From Moneyweb.

The British American Tobacco research centre in the UK. Image: Luke MacGregor, Bloomberg

The British American Tobacco research centre in the UK. Image: Luke MacGregor, Bloomberg

The tobacco industry can’t quite shake off its shady image.

Two months ago there was an assassination attempt on Zimbabwe-based Simon Rudland, CEO of Gold Leaf Tobacco, as he and his attorney were entering the driveway of the Johannesburg offices of the Fair Trade Independent Tobacco Association (Fita), which represents smaller cigarette producers.

Read: Tobacco wars turn deadly

When Moneyweb visited him at his Johannesburg factory a short while back, he stuck to his initial claim that a competitor was trying to rub him out. He survived the assassination attempt but now travels with a convoy of private bodyguards when in SA and has his own private investigators on the case.

This says something about the state of the cigarette business in SA. Johann van Loggerenberg’s book ‘Tobacco Wars’ lays out the field of battle and who the main players are. It’s a dirty business, but we’ll come to that in a minute.

On November 4 Fita served a Promotion of Access to Information Act (Paia) request on British American Tobacco SA (Batsa) to make public the findings of an investigation into the cigarette giant’s alleged conduct several years ago against its smaller competitors.

Read: Illicit tobacco trade: Cheap manufacturer fights back

In September 2016 Batsa announced that it had severed ties with forensic investigation firm Forensic Security Services (FSS), which has been accused of dirty tricks against smaller producers.

‘Rogue unit’

The ‘rogue unit’ supposedly operating within the South African Revenue Service (Sars) emanates from a mix of shady sources and contributed hugely to the state capture project, Van Loggerenberg told Moneyweb.

A former tax investigator for Sars, he was accused of being part of the rogue unit, a story now debunked (and for which the Sunday Times, Carte Blanche, KPMG and Judge Frank Kroon have apologised). It had all the elements of a counterintelligence operation, but the real purpose was to kill off a devastatingly successful investigation unit that had tightened the noose on criminals and big-time tax dodgers.

Van Loggerenberg estimates that the spiking of this Sars unit has probably cost SA R3 billion in tax revenue.

The rogue unit story was kept alive for years, and implicated Van Loggerenberg, fellow Sars officials Ivan Pillay and Andries Janse van Rensburg, as well as Public Enterprises Minister Pravin Gordhan, who was previously in charge of the tax agency. It was claimed the unit bugged the offices of senior politicians, including former President Jacob Zuma, and operated an illegal brothel. These claims have since been debunked. Gordhan has repeatedly claimed this rogue unit story was floated by those opposed to ridding the country of corruption.

According to Tobacco Wars, FSS recruited former cops and spooks ostensibly to stop illicit trading in cigarettes, but one of its key tasks was to spy on Batsa’s competitors. A key piece of evidence in support of this claim is an affidavit from former FSS employee Francois van der Westhuizen, in which he says he was told that all his actions – including the interception of communications and breaches of the right to privacy – were sanctioned by the law.

In hindsight, he says, the purpose of his employment was for Batsa to use his investigative skills, with back-up from corrupt police and Sars officials, “to disrupt the business of Batsa’s competitors”.

All this is detailed in Tobacco Wars and has yet to be refuted by Batsa, says Van Loggerenberg, probably because the evidence and documentary back-up is substantial.

The alleged reach of the FSS was astonishing, and included Sars, the Hawks, the South African Police Service, the Crime Intelligence Unit, the Asset Forfeiture Unit, and the Customs and Traffic Control Policing Unit.

Batsa head of external affairs Johnny Moloto replied that the report in question “is legally privileged and was prepared for the purpose of British American Tobacco obtaining legal advice”, stating: “The contents of the report may be relevant to ongoing investigations and litigation. British American Tobacco has made disclosures to the appropriate South African and other law enforcement authorities.”

Moloto then fired off some accusations of his own against Fita, whose members have come under increasing scrutiny by Sars. He says Fita’s allegations against Batsa are an attempt to deflect attention away from themselves, by dredging up allegations that have been in the public domain for more than five years.

Says Moloto: “British American Tobacco has and will continue to co-operate with any investigation by law enforcement authorities in South Africa or anywhere else.”

In support of Moloto’s claims of smaller producers attempting to deflect attention away from themselves, Batsa points to a 2018 study by the Economics of Tobacco Control Project (ETCP) at UCT, headed by Professor Corné van Walbeek, which shows a steady decline in excise tax revenue from tobacco products.

“Excise tax revenue from tobacco products decreased by approximately 10% between the financial years 2016/17 and 2017/18, despite an 8% increase in the excise tax per pack of cigarettes in that period. Overall, between 2016 and 2018, there was a 20% decrease in the number of tax declared cigarettes,” says the UCT report.

The graph below is taken from the report and shows the decline in excise revenue since 2015.

Source: The Economics of Tobacco Control Project at UCT (2018)

“Such a rapid decrease in consumption over this short period cannot be explained by changes in people’s smoking patterns alone,” van Walbeek contends. “Instead, it points to a large increase in the illicit cigarette market.” 

Data from SA’s poorest areas shows packets of cigarettes selling for R10 when the excise alone was R15.52 per pack.

The evidence is that illicit sales of cigarettes and smuggling are rampant, despite efforts by Sars to snuff it out. A position paper released by the Tobacco Institute of SA this year suggested illicit cigarettes in the informal sector accounted for 42% of the market, and a third of the national market. Some packs are selling for as little as R5 when the excise payable to Sars is R17.85 per pack. This suggests a loss to the fiscus of R40 billion since 2010.

Sars is taking action

Sars has started to act on this massive leakage. When Moneyweb visited Gold Leaf Tobacco in Johannesburg recently, Sars inspection teams were visible on the factory premises, and Rudland confirmed they were permanently encamped (and welcomed). Batsa likewise confirmed the presence of Sars teams at its production facilities. Sars officials have been despatched to all cigarette factories in SA, and this reportedly had an immediate impact on revenue collection. It could be that Sars is at last starting to turn the tide against illicit cigarette sales.

The reason Sars has a special interest in the tobacco industry is its rich history of smuggling and illicit trade, as Van Loggerenberg makes plain in his book.

Back to Fita’s PAIA application and its attempt to get access to Batsa’s internal investigation into the now reasonably well-documented activities of FSS. Its operatives are alleged, by former employee Van der Westhuizen, to have placed tracking devices on competitor trucks to monitor their frequency, type of stock and to see who was receiving the goods.

They intercepted phone calls, placed hidden cameras at competitors’ workplaces and homes, and followed their vehicles around.

The spies also stole commercially sensitive documents, such as production schedules and invoices, and handed these to their FSS ‘handlers’ who would then allegedly pass them on to Batsa.

Tobacco companies were also making donations to political parties.

“It is no secret that the small manufacturer Carnilinx has made donations to the EFF [Economic Freedom Fighters] or that Yusuf Kajee of Amalgamated Tobacco Manufacturers was an outspoken supporter of Jacob Zuma’s presidency. But we do not really know to whom the big boys have donated money, or how much and for what reasons,” according to Van Loggerenberg in Tobacco Wars.

Fita and Carnilinx have since apologised to Sars and the affected officials for any role they may have played in advancing the rogue unit story. The tobacco sector was crawling with double agents, and some of the players got duped, says Van Loggerenberg.

The statement issued by Fita two weeks ago says that after the allegations of spying by FSS became public knowledge in 2016, Batsa had instructed three sets of attorneys in SA and the UK – Norton Rose Fulbright, Linklaters and Slaughter and May – to conduct investigations on their behalf “in respect of allegations that implicated Batsa and/or British American Tobacco plc and its agents and/or service providers of conduct, including but not limited to unlawful surveillance, unlawful interception of private communications, corruption, money laundering, tax evasion, unfair trade practices, and undue influence over law enforcement officials in the Republic of South Africa”.

It’s now more than three years since the investigation was announced and the findings have yet to be made public.

Fita’s Paia request seeks to flush it into the open. Financial Mail had previously filed a similar Paia request, to no apparent avail.

“It is our understanding that Batsa prides itself as a law-abiding entity,” adds Fita, “and we, therefore, implore them to do the right thing and to ensure that they keep their reputation intact by not allowing this dark cloud to remain over their heads, and by bringing to light the steps taken in ensuring that those who acted unlawfully and tarnished the name of Batsa and BAT plc have been brought to book.”

Van Loggerenberg says he holds out little hope of Batsa releasing evidence that implicates it or any of its service providers and agents in unlawful activities.

“Nor do I expect Batsa to publicly acknowledge their relationships with, and the roles played by, some of their secret agents, or any other implicated law enforcement and intelligence operatives, such as the unholy and rogue so-called Tobacco Task Team. Doing so would demonstrate how these rogue agents deliberately sought to discredit the SA Revenue Service and its officials from 2014 onwards, purely to distract from and hide away their own sins. The result was that their actions gave birth to the now wholly discredited ‘rogue unit narrative’ which was capitalised upon with great fervour by all and sundry that wished to capture Sars.”

By making disclosures to the authorities and law enforcement officials, Batsa was attempting to wash its hands of past wrongdoing, adds Van Loggerenberg.

“The fact that the Public Investment Corporation holds about R30 billion in shares in Batsa doesn’t seem to matter either. It is for a few privileged persons and lawyers at Batsa to know and nobody else.

“The fact that Fita members have been found wanting on compliance issues in the past, is a complete sideshow and distraction. The public is well aware of their sins and the consequences of these. This is no secret. Fita members collectively hold significantly lower market share [than] Batsa. None are listed multinationals either. Batsa should perhaps focus on their own sins, before pointing fingers at others.”

In November 2013 and April 2014, Sars publicly announced its intention to pounce on spies and dirty tricksters in the tobacco trade. Van Loggerenberg says Sars was about to expose all of them and hold them accountable.

“Their counterattack suited state capture perfectly, and the rest is history. Every South African is now paying for the consequences of these events, whether it is a poorer government, fewer services, increased Vat and lower tax collections. This matter should concern everybody that cares for our country’s future.”

Soweto residents lose first round in battle over electricity

Written by Ciaran Ryan. Posted in Journalism

They asked the court to force Eskom to reconnect them, and to cap tariffs at R100 pm. From Moneyweb.

Residents stand in protest after judge dismissed case on the grounds that it lacked urgency. Image: Supplied

Residents stand in protest after judge dismissed case on the grounds that it lacked urgency. Image: Ciaran Ryan

Several hundred Soweto residents got blown out of the Johannesburg High Court on Wednesday, after asking the judge for an urgent order compelling Eskom to reconnect their electricity and cap their monthly payments at R100.

Acting Judge Marcus Senyatsi threw the case out of court on the grounds that the case lacked urgency. He also said the court application, prepared by King Sibiya of the Lungelo Lethu Human Rights Foundation, looked more like a petition.

Read: Soweto residents to take Eskom to court

Eskom said it found it difficult to respond to some of the community’s allegations and asked that the matter be struck from the roll.

Many of the residents have had their electricity disconnected for more than six months. The case must now be placed on the ordinary roll and await a court date, probably well into 2020.

“Of course we are disappointed by the judge’s decision,” says Sibiya. “I was denied the right to argue the case for the residents of Soweto, most of them sick or elderly, because I am not a lawyer. We regard this as a denial of access to justice and this is something that we intend to take up with the Department of Justice.

“There is no question that this is an urgent matter, given the escalating service delivery protests that are happening around Soweto.”

Sibiya and other community members were frustrated at the judge’s adherence to court formalities, rather than the substance of the case and its broader impact on human rights.

Read: Electricity: Who pays what

This week actor Patrick Shai was injured when shot with rubber bullets by police, as he tried to stop the police from using force against community members protesting service disconnection.

Service protests have erupted in several parts of Soweto in recent months. Eskom’s latest annual report suggests arrears of R18 billion from Soweto, out of total arrears of about R40 billion.

Soweto community activist Monde Mngqibisa says frustrations are growing in Soweto, as most of the applicants in the case have prepaid meters but have been disconnected because Eskom has failed to do basic maintenance. The court papers also suggest that some of the meters have malfunctioned or caught fire. “We are not giving up,” says Mngqibisa. “We will regroup and re-present the case.”

‘Group punishment’

Mngqibisa says he has not been affected by the disconnections but approached Eskom on behalf of community members. Some residents were told by Eskom to get their neighbours to start paying their electricity before their homes would be reconnected, which is a form of group punishment, according to Sibiya.

Moneyweb spoke to several of the applicants in the case, who dismissed the notion that Eskom disconnected their electricity for being in arrears. “That’s not true,” says Sello Mahsiloane, one of the applicants. “We are on prepaid meters and the reason we are disconnected is because the mini sub-station Eskom has [has] been broken for months and has not been repaired.

“Yet [President Cyril] Ramaphosa’s house nearby has electricity. How is that possible?

“My child failed school because there is no light at night for studying.”

Mashiloane is a diabetic and says he is forced to use candles for light and a “gel” stove for cooking. Martha Sedibe has a two-week-old grandchild living with her, and has been forced to use candles and a paraffin stove for six months since Eskom cut off power in the area in June. She is also on a prepaid meter and normally spent R300 to R400 a month on electricity.

Pamela Thobela of White City in Soweto says parts were stolen from an electricity sub-station in her area several months ago, and residents in her area have been without power since then.

Sibiya says he is in discussion with several legal organisations to provide representation for the next phase of the battle to restore lights to Soweto.

Read: Army protects Eskom workers as they remove illegal connections 

SAA on collision course with trade unions in a fight for survival

Written by Ciaran Ryan. Posted in Journalism

It’s sink or swim time for the national airline, as it contemplates retrenching up to 9% of its staff. From Moneyweb.

SAA appears to be on a collision course with trade unions as it contemplates retrenchments – perhaps as much as 9% to 10% of its 10 000-strong labour force (including subsidiaries) – in a fight for financial survival.

Trade unions were notified on Tuesday that retrenchments are being contemplated. The National Union of Metalworkers of South Africa (Numsa) and the South African Cabin Crew Association (Sacca) say they learned of the restructuring and retrenchment plans through the media. They have called for the SAA board to be scrapped, saying it is unfit to run the airline, and plan the “mother of all strikes” in response.

SAA refutes claims that labour was notified of the restructuring and retrenchments via the media. At a press briefing at SAA’s head office near OR Tambo Airport on Tuesday, the airline’s interim CFO Deon Fredericks said a Section 189 notice in terms of the Labour Relations Act was issued to recognised trade unions on Monday. This is a prerequisite whenever retrenchments are contemplated.

Threats

A joint statement by Numsa and Sacca says demands for a wage increase of 8% have been rejected by the airline, while Air Chefs staff and airline pilots received wage increases of between 5.9% and 7%. “This is why we are questioning the timing of this announcement. It is a veiled threat to get workers to drop their demands for wage increases and for the removal of the SAA board. They want to strike fear into the hearts of our members. We condemn the management with the contempt they deserve,” says the joint statement by the trade unions.

Acting Human Resources General Manager Martin Kemp explains that Air Chefs was subject to the catering bargaining council, while pilots were able to enforce a 2010 agreement on salary increases after this went to arbitration. The airline was obliged to honour these agreements.

Says Fredericks: “It is our hope that our unions will grasp the full extent of the financial situation we find ourselves in and engage with us in finding a constructive way going forward.”

He adds there is no finality on the number of workers to be retrenched. A figure of 944 has been mentioned which, depending on the seniority and type of worker, could yield savings of R700 million a year. The final figure on retrenchments will only be known once consultations with the unions have run their course.

Last year the airline saved R600 million through more efficient procurement and cutting out agents and middle men.

The airline says it has contingency plans in the event of a labour strike, but adds there is little it can do if there is a complete shutdown of operations.

Labour unions have threatened a total shutdown of the airline, which could sink it outright.

SAA is under pressure from lenders to show progress in its financial turnaround. In June it was announced that SAA needed an additional R4 billion to survive the current financial year. Government has committed to repaying the airline’s R9.2 billion guaranteed debt over the next three years. SAA has run up cumulative losses of more than R28 billion over the last 13 years, and government is keen to find an equity partner to reduce the airline’s drain on the fiscus. Fredericks says reaches have been made to potential partners, but that there is little concrete interest until the airline is financially stabilised.

The airline’s restructuring plans include subsidiaries Mango Airlines, Air Chefs and SAA’s technical divisions.

Cutting costs

Fredericks said ongoing negative publicity about the airline is costing it dearly in terms of sales. Previously, SAA would make promises to lenders, now it is able to show turnaround results: such as the R600 million savings on procurement and technical improvements that reduced aircraft repair times from 63 to 35 days. “This is based on a pilot, but it shows what can be achieved if extended across the airline,” said Fredericks.

Labour costs accounts for 24% of turnover, and fuel 27%. There is little the airline can do to reduce fuel costs, which is why it is forced to look at reducing staff numbers. Management has identified non-core assets that could be sold to realise funds. The airline has also made progress in improving route profitability and identifying new routes under Chief Commercial Officer Philip Saunders.

“If this was a growth market, we would be having a different discussion,” said Fredericks. Average fares dropped 12% in US dollar terms, while passenger volumes were up just 2% over the last year. Another area of focus is fleet optimisation around Airbus A350s, which are renowned for fuel efficiency and low maintenance costs.

There are questions about the airline’s political capital to drive change, given that so many senior appointments are acting rather than permanent – a policy that appears to leave the door open for an equity partner to appoint a management team of its choosing.

“SAA has created an enabling environment of engagement with all its internal stakeholders, especially labour unions. We understand that this is a difficult time for all employees,” says Fredericks.

“SAA’s primary goal is to transform into a financially sustainable airline, with a renewed focus on driving customer centricity, commercialising the airline, route network profitability, strengthening commercial and aviation skills and a series of strategic initiatives that will refocus the organisation in driving a profit and loss ethos with a strong focus on cost management revenue and cost.”

Take published financial statements with a bucket of salt

Written by Ciaran Ryan. Posted in Journalism

They’re riddled with self-serving estimates. From Moneyweb.

Ethical problem – or is there something in IFRS that makes it prone to manipulation? We urgently need an answer, says Saiba CEO Nicolaas van Wyk. Image: Shutterstock
Ethical problem – or is there something in IFRS that makes it prone to manipulation? We urgently need an answer, says Saiba CEO Nicolaas van Wyk. Image: Shutterstock

The accounting profession is having a crisis, and not just in South Africa.

The monumental wealth destruction at Tongaat and Steinhoff tells a story of fudged figures and accounting legerdemain (deception).

Read: Steinhoff, Tongaat woes raise South African auditor scrutiny

It’s a problem long recognised among stock analysts and bankers, who spend their days reconstructing published accounts to read past the PR fluff. Earnings before interest, tax, depreciation and amortisation (Ebitda) was supposed to be a partial solution to this dilemma, but even this no longer does the trick.

As much as the accounting profession tries to close loopholes through enforcement of International Financial Reporting Standards (IFRS), there is still enough room here to fly a Boeing through a balance sheet.

The US Public Company Accounting Oversight Board recently found that the Big Four accounting firms – EY, PwC, Deloitte and KPMG – bungled 31% of the most recent US audits analysed.

Most of these transgressions go unpunished, despite the board being set up in 2003 to avoid another Enron or WorldCom-type collapse. Because auditors are paid by the companies they audit, there is a clear incentive to deliver the results management wants. The UK’s public audit watchdog, the Financial Reporting Council, says it will make public its grading of audit inspections following high profile company failures, such as builder Carillion and retailer BHS.

Estimates and assumptions

Part of the problem is that accounting standards lean heavily on estimates and assumptions. Revenue can include amounts that are not yet banked, as appears to have happened at Tongaat.

Read: Suspension of Tongaat trading a potential crisis for other shares

When to recognise revenue involves making executive assumptions that do not always agree with reality. For example, there must be reasonable assurance that the proceeds of a transaction are collectible. When it comes to complex land sales, this leaves the door open for the counting of revenue (and hence profits) that doesn’t actually exist either now or in the foreseeable future.

And when executive bonuses are tied to profits, it’s easy to see how this system can be manipulated. Companies seldom disclose how much of their revenue is based on estimates.

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says the accounting standard-setters are under huge pressure to adjust the regulations and standards being used to prepare and report on financial statements. “In this process of adjustment, care should be taken to ensure we make progress in the right direction.

“Corporate scandals driven largely by CEOs and CFOs manipulating IFRS to obtain favourable revenue, profit and asset valuation numbers are causing havoc in the industry.

“The question that needs to be asked is this: is the problem an ethical one or is there something in IFRS that makes it prone to manipulation? We urgently need an answer.”

He adds that the accountant of the future will have to adopt the mindset of a stock analyst or banker, where common sense adjustments will have to be made to published accounts.

Usefulness, or not

In a study on the usefulness of published accounts, researcher Baruch Lev places much of the blame on the proliferation of estimates in financial reports: “To a large extent, financial reports are based on estimates, judgements, and models rather than exact depictions,” he says.

“Estimates increase the noise and error in financial information, particularly when they are made by persons [management] having strong incentives to affect the perceptions of investors.”

There is debate in the accounting community as to whether intangible assets such as goodwill should be written off against income. Great brands such as Coca-Cola increase the revenue-generating capacity of a company, so why expense it against income?

Take Steinhoff as an example. It restated ‘errors’ for 2015 and 2016, writing down its asset values by R8.2 billion for 2015 and R11.4 billion for the 14 months to September 2016. That’s a nearly R20 billion write-down over two years, with most of this coming from evaporating intangible assets, followed by the effects of accounting irregularities. That restatement knocked R1.6 billion off the 2016 profit.

Yet these are the accounting standards to which all listed companies are held. A recent accounting change is IFRS 16, which brings billions of rands worth of leases, previously treated as expenses or ‘off balance sheet’ items, back onto the balance sheet where they rightfully belong.

In the past, leases were a way for companies to keep liabilities off the books, which is how you want it when approaching the bank for a loan.

Bankers understood the accounting game and would usually fix the problem by simply putting leases back on the balance sheet.

A PwC study of nearly 3 200 companies (‘A study on the impact of lease capitalisation’) estimates that the reported debt of these entities will rise by 22% as a result of IFRS 16. Many leases of fairly long duration, that were previously expensed to the income statement, are now shifted to the balance sheet as liabilities (with a corresponding asset entry). This can radically alter debt ratios – although, from a practical and cash standpoint, there is no real change.

It’s simply a matter of moving figures around on a spreadsheet.

By the time Tongaat’s shares were suspended at the company’s request in June, the share price had slid to a tenth of what it was two years ago, after information about its creative accounting practices surfaced. It seems land sales were counted as revenue before the deals were hatched, and stock was overcounted.

Its figures for the March 2019 year-end have yet to be released. In October, the company informed the market that it had conducted a six-year review process necessitating amendments to its accounting policies and practices. It is also reviewing key assumptions used in arriving at past results.

Therein lies the problem.

Despite the widespread adoption of IFRS – supposedly to settle on a common global language for business accounting – the feast of accounting scandals shows no sign of abating.

Steinhoff’s value destruction is Olympian in scale, with more than R200 billion in equity wiped out since 2017.

For a time it was heralded as a great retailing success story, breaking out of its southern African shell to spar with the biggest and the best abroad. It gobbled up competitors and flew the South African flag across Africa and Europe with brands such as Pep, Ackermans and Poundland.

But the figures were a pack of lies. PwC investigated and found fictitious or irregular transactions worth about $7.4 billion over eight years. These fictitious transactions were concocted by senior managers to create phoney income that hid losses elsewhere in the group.

“The transactions identified as being irregular are complex, involved many entities over a number of years and were supported by documents including legal documents and other professional opinions that, in many instances, were created after the fact and backdated,” says Steinhoff on its website.

Manipulating figures is not confined to auditors and accountants. Investment bankers are prone to the same disease, as shown by the recent decision to pull the listing of US real estate company WeWork. Its listing documents repeatedly claimed it was a tech company rather than a renter of office space, in an attempt to mislead investors and justify a company valuation of $47 billion. What was to be the US’s “most valuable tech start-up” has observers now wondering whether it can avoid bankruptcy.

And all this in the space of weeks. That should trouble anyone relying on financial statements as a guide to corporate truth.

Damien Klassen of Nucleus Wealth, writing in Livewire Markets, shows how easy it is to double a company’s valuation by carefully rounding off assumptions. The tweaks are so slight you would barely notice them.

Analysts and investors rely on earnings-centred valuation models, but that becomes a problem if reported earnings deviate too far from actual business performance, says Lev. A 2017 study shows that even if you made perfect earnings predictions, your investment performance would not be significantly better than those who were poor predictors of earnings.

This perhaps explains the flight from managed to index funds.

Over the last five years Amazon missed almost half of the quarterly analyst consensus forecasts, while becoming one of the most valuable firms in the world.

Lev says the problem started when accounting standard-setters moved to the so-called balance sheet model, which “increased exponentially the number and impact of subjective managerial estimates underlying financial information”.

“A fair number of these estimates are of low quality and are sometimes manipulated, further eroding the usefulness of financial information.”

How to value goodwill and brands (and then expense them against income) has the veneer of scientific rigour, but is often as good as a guess.

The solution, suggests Lev, is a return to the “income statement” rule-making model, where revenues and the associated costs are matched. Income statements under the current regime include intangible asset expense write-offs that can massively distort actual enterprise performance.

No wonder auditors pad their accounting sign-offs with pages of explanations and caveats.

A better solution, says Van Wyk, is to have in independent body appoint auditors to companies, thereby denying management the ability to skew results in favour of their bonuses and egos.

Sale of Koornfontein coal mine hits legal snag

Written by Ciaran Ryan. Posted in Journalism

It’s been nearly two years since the Gupta-owned operation was placed in business rescue. From Moneyweb.

The losing bidder is within its rights to bring the application, but this could delay the recommencement of operations at Koornfontein. Image: Ciaran Ryan, Moneyweb

The losing bidder is within its rights to bring the application, but this could delay the recommencement of operations at Koornfontein. Image: Ciaran Ryan, Moneyweb

The sale of Koornfontein coal mine – one of the Gupta companies now in business rescue – has hit a legal obstacle: losing bidder Lurco Group is asking the High Court to interdict the business rescue practitioners from selling the mine to another bidder, Black Royalty Minerals (BRM).

Read: Auction for Gupta mining assets hots up

Lurco submitted two bids for the mine, both for R500 million. The initial bid was backed by funding from Central Energy Fund (CEF) subsidiary African Exploration Mining and Finance Corporation (AEMFC). CEF is owned by the state. Lurco also submitted an alternative bid, independent of AEMFC, with funding from Ocean Partners Holdings.

Read: Dubai’s DSA leads bid for mines once owned by Guptas, Glencore 

Lurco says the business rescue practitioners (BRPs) unlawfully changed its business rescue plan in October when they demanded that the full purchase price for the Koornfontein assets be placed in a South African bank account within five days. Lurco was unable to meet this deadline as funds had to be shifted from an overseas account, for which regulatory approval was required.

Having missed the deadline, BRM was anointed as the preferred bidder. The BRM bid, at about R300 million, is substantially lower than Lurco’s. Lurco’s R500 million offer was far superior to other bids received – which ranged from R217 million to R300 million – according to Lurco chief operating officer Aubrey Chauke’s affidavit now in front of the court.

The fact that the BRPs were now selecting the inferior BRM bid meant creditors and employees would be deprived of 60c in the rand.

Had Lurco been made aware that the full purchase price would have to be placed in a South African bank account within five days, it would have amended its bid accordingly.

Chauke’s affidavit says Lurco submitted two bids for Koornfontein in compliance with the conditions outlined by the BRPs in July. In late September, Lurco was advised that its alternative bid had been selected as the qualifying bidder subject to the payment of an initial amount of R45 million into an escrow account.

Legitimate expectation

Chauke says Lurco had legitimate reason to expect that it would be the purchaser of the mine on terms outlined by the BRPs in September.

Attorneys for the BRPs, Smit Sewgoolam, wrote to Lurco on October 26 explaining that the amended bid condition that the full purchase price be placed in a South African bank account within five days was imposed by the mine’s “affected persons” by way of a vote that was passed on October 18. The BRPs were therefore bound by the adopted rescue plan and were obliged to implement it.

Lurco counters that the BRPs are bound by the Companies Act to adopt the original business plan of October 4, and not the amended one of October 18. Chauke says there is no provision in the Companies Act for the amendment of a business rescue plan after it has been approved and adopted.

Read: Optimum Coal workers go unpaid as rescue practitioners race to sell mine

The court papers suggest Eskom is a “contingent post-commencement creditor” of Optimum Coal Mine, also under business rescue, for R1.07 billion, being penalties levied by Eskom for non-delivery of coal. Lurco claims this applies to Optimum, not to Koornfontein, which therefore reduces Eskom’s voting rights in terms of the business rescue plan.

In this case, the rescue plan could not have received more than 75% of support from creditors as required by the Companies Act.

The BRPs are therefore bound to implement the original business rescue plan which did not require the full purchase price to be placed in a South African bank account within five days.

Responding to the court application, business rescue practitioner Louis Klopper says the Lurco application will be opposed.

“As BRPs, we are compelled to follow the instructions of creditors, and these were the conditions we are mandated to execute. Lurco is within its rights to bring this application, but we are concerned that this could delay the recommencement of operations at Koornfontein.”

How the state capture project washed up on Capitec’s door

Written by Ciaran Ryan. Posted in Journalism

A judgment handed down on Tuesday doesn’t read well for the bank. From Moneyweb.

Court finds that Capitec has been in breach of its contractual and common law duty of good faith to its BEE shareholders. Image: Moneyweb

Court finds that Capitec has been in breach of its contractual and common law duty of good faith to its BEE shareholders. Image: Moneyweb

It was a bad day in court for Capitec on Tuesday after Judge Bashier Vally found the bank in breach of contract and common law when it sought to block its BEE shareholder, Coral Lagoon Investments, from selling its shares to settle a R500 million claim from the Transnet Second Defined Benefit Fund (TSDBF). Coral Lagoon is ultimately owned by Regiments Capital.

Some of these names will be familiar to followers of state capture.

Coral Lagoon and the Transnet pension fund found themselves on the same side in the case against Capitec, but for entirely different reasons. The Transnet pension fund says it was a victim of state capture where Regiments “fleeced various arms of the state, state-owned enterprises and pension funds of employees employed by state-owned enterprises”.

Rather than fight the matter, Regiments and its shareholders decided to settle with the Transnet pension fund for R500 million, discounted from the original claim amount of R825 million.

‘Largest single recovery of state captured funds’

But for this deal to go smoothly, Capitec would have to be on board. Email correspondence between the bank and the pension fund and its attorneys suggested this settlement agreement was “of substantial national importance and prominence” as it was the “largest single recovery of state captured funds”.

In some of the correspondence before the court it seemed Capitec was initially amenable to the settlement, but quickly changed its tone, informing the BEE shareholders that they were prohibited from disposing of their shares in terms of a BEE share subscription agreement of 2006. The purpose of this restriction was to maintain Capitec’s BEE shareholding.

Capitec had invoked a share subscription agreement from 2006 to block the sale of the shares. This agreement required that the shares could only be sold to another qualifying BEE shareholder so as not to dilute its BEE shareholding. Coral Lagoon had earlier sold some of its shares in Capitec in settlement of a loan to the Industrial Development Corporation and to pay off a tax bill with the South African Revenue Service.

Here is a choice quote from the judgment:

“By refusing to grant consent for the sale on this basis means that it [Capitec] is quite willing to retain Regiments as a shareholder, even though it recognises that Regiments has stolen more than R1 billion from indigent pensioners belonging to the TSDBF.

“The logical conclusion of its position is that the loss of 0.7% of its B-BBEE rating is so important that it would rather keep its links with a shareholder who is tainted by dishonesty than reduce the rating.”

‘Legally wrong’

Judge Vally wasn’t finished with the bank just yet. Capitec also claimed it would have to seek shareholder approval for the sale in terms of the JSE Listing Requirements.

“The TSDBF pointed out in its papers that this is simply legally wrong,” reads the judgment.

“Capitec made no effort in its answer to explain why [Capitec chair] Ms [Santie] Botha misleadingly claimed that the JSE Listing Requirements was an obstacle to it consenting to the sale.”

Botha also claimed that the sale of shares would be prejudicial to Capitec, as it would benefit certain individuals who were involved in alleged criminal activities. The Transnet pension fund replied that this was incorrect and that none of the parties guilty of unlawful conduct in the “state capture” would benefit from the sale.

There was more. There were a number of ancillary court actions along the way: one judgment required Regiments to provide security to the pension fund, and another prevented it from dissipating its assets. The alleged victims of the state capture project were circling Regiments.

Inconsistent action

The judgment does not read well for Botha or Capitec: on the one hand they were issuing threats against the BEE shareholders who wished to sell some of their shares, while at the same time saying they wished to engage with the pension fund. The purpose of these inconsistent statements was the issuance of threats, said the pension fund in its court papers.

Capitec had made a number of changes in its approach to the sale of the shares, at one point agreeing to an “open offer” where some of the shares could be sold on the open market, with the balance subject to restrictions (they could only be sold to a qualifying black person). The open offer was rejected by Coral Lagoon.

This change in stance towards its BEE shareholders undeniably demonstrated that Capitec had acted in bad faith and was in breach of its duty of good faith, said the pension fund.

Here are some more choice words from the judge: “Having changed its stance on more than one occasion, it became incumbent upon Capitec to explain why it had contended in the letters and emails referred to, and quoted from, above that Coral Lagoon was ‘prohibited’ from selling the shares. In this regard it simply said that the averments made therein ‘were incorrect’.

“But saying they ‘were incorrect’ is not an explanation: it is either a statement of fact or an opinion. An explanation would have to furnish reasons for why the contentions were made. It would also have to focus on why it was followed up with the forceful threat that litigation would ensue should the sale proceed without its consent.

“The contention and the threat were made on more than one occasion and were made by its attorney and the chairperson of its board.

“These are senior persons. Any reasonable person who received them would be entitled to accept that the contention was correct and the threat was real. After all they emanated from persons who would be expected to have the skill, knowledge and experience to present a true and correct account of the subscription agreement and who would be careful before making threats.”

Successfully dissuasive

The threats made by Capitec against the BEE shareholders were designed to intimidate, and they succeeded in dissuading other BEE shareholders, namely Rorisang and Lemoshanang.

“With regard to the common law duty of good faith, I find Capitec’s claim that no such a duty exists in our law to be incorrect. Any person changing its stance so radically and not explaining itself cannot be said to be acting in good faith. It is also not acting with due regard to its duty of candour to this court.”

Judge Vally found that Capitec’s refusal to consent to the sale of the shares was in breach of its contractual and common law duty of good faith to the BEE shareholders.

Asked to comment, Capitec Bank replied: “We are aware of the judgment and will comment after we have had a chance to study it and discuss it with our legal team. We expect to make a statement in the week.”

A decade of budgetary whoppers

Written by Ciaran Ryan. Posted in Journalism

Is Tito trying to break the tradition of ministerial delusion? From Moneyweb.

'This is a serious position to be in,' said Tito Mboweni during his budget speech on Wednesday.

‘This is a serious position to be in,’ said Tito Mboweni during his budget speech on Wednesday.

How do you know when a Finance Minister is lying? When he makes a prediction.

There is a fine tradition of Finance Ministers telling whoppers in their budget speeches. Granted, it’s never easy to make accurate predictions on anything fiscal, but the track record of our ministers in calling GDP growth rates is abysmal. They’ve over-stated GDP in eight out of the last 10 years, sometimes by inexcusably large margins.

Read the MTBPS here.

Given this track record, we should treat budget estimates as PR gibberish intended to mollify the restless limbs of the ruling coalition.

This is not a slight matter. The country’s tax receipts and borrowing requirements are tied to the accuracy of economic forecasts. Every time Treasury over-estimates economic growth, the shortfall has to be made up in borrowings, and you can see the result of that in the public debt-to-GDP table below.

Public debt to GDP

Virtually every year in the last decade, tax receipts were lower than expected. Just two months ago Mboweni released a growth plan for the country entitled ‘Towards an Economic Strategy for South Africa’ which aims to kick the economy into high gear and wrestle down unemployment.

There were some references to this plan in yesterday’s Medium-Term Budget Policy Statement (MTBPS), delivered to Parliament by Mboweni. The Integrated Resources Plan, outlining the country’s energy future, has been gazetted; Home Affairs has simplified the visa regime (but the implementation is way behind schedule, according to tourism experts); and plans are afoot to accelerate the licensing of the broadband spectrum.

These on their own will not shift the economic needle anywhere near what is needed to get the economy moving again.

Mboweni doused growth expectations for the current year, reducing the GDP forecast to a miserable 0.5% from the 1.5% forecast made in his budget speech in February. The budget deficit is expected to reach 5.9% of GDP in the current year, which takes us back to the levels last seen at the time of the 2009 financial crisis. He expects growth to reach 1.7% by 2022. In other words, we will remain trapped in a low-growth cycle for the foreseeable future.

Source: National Treasury, StatsSA, Trading Economics

Year               Forecast                Actual             Minister of Finance

2019                 1.5%                             0.5% (Est.)      Tito Mboweni

2018                 1.5%                             0.7%                 Malusi Gigaba

2017                 1.3%                             1.3%                 Pravin Gordhan

2016                 0.9%                             0.5%                Pravin Gordhan

2015                 2.0%                             1.5%                 Nhlanhla Nene

2014                 2.7%                             1.5%                 Pravin Gordhan

2013                 2.7%                             2.2%                 Pravin Gordhan

2012                 2.7%                             2.5%                 Pravin Gordhan

2011                 3.4%                             3.3%                 Pravin Gordhan

2010                 2.3%                             2.8%                 Pravin Gordhan

Perhaps there is some truth in the claim that Mboweni’s sobering assessment of our current economic malaise is intended to shock his ANC colleagues into more radical reform.

If so, this kind of truth-telling would be a welcome change of form.

Revisiting some of the fanciful predictions made by finance ministers over the last decade is sobering.

In his 2017 budget speech, then finance minister Pravin Gordhan declared: “Government debt will stabilise at about 48% of GDP over the next three years. The budget deficit for 2017/18 will be 3.1% of GDP.”  The actual figures for government debt in 2017 were 53% and the actual budget deficit for 2018 was 4.4%.

Budget deficit 2009-2018

In his 2016 budget speech, Gordhan said the budget deficit would be reduced to 2.4% by 2018/19. It actually came in at 4.4% in 2018.

In 2014, the budget deficit was projected to be 4%, but came in at 4.3%. In the same year GDP growth was projected at 2.7%, rising to 3.5% by 2016. The actual figures were 1.5% and 0.5%. It’s clear the longer the time horizons, the more divorced from reality are the projections.

In 2013 the budget deficit was expected to fall from 5.2% of GDP to 3.1% in 2015/16. The deficit came in at 4.1% in 2015 and 3.8% in 2016.

And so it goes on.

In 2012 the budget deficit was projected at 4.6% of GDP (not bad, it came in at 4.4%), with a plan to reduce it to 3% in 2014/15 (way off the mark, it came in at 4.1%).  That same year public debt was expected to stabilise at about 38% of GDP (this was way out: public debt to GDP was nearly 50% in 2015).

Back in 2011 Gordhan bemoaned the youth unemployment rate of 42% (for people between 18 and 29). Youth unemployment (ages 15-24) is today sitting at 55%.

Read: SA Q3 unemployment rate stays at 11-year high

Growth expectations for 2010 were 2.3%, rising to 3.6% by 2012. Actually, growth exceeded Gordhan’s 2010 forecast, but he was way off the mark with his 2012 forecast of 3.6% (the actual growth for 2012 was 2.5%).

The cumulative effect of these over-estimates is a rising debt burden which Mboweni believes will exceed 70% of GDP by 2022/3. “This is a serious position to be in,” said Mboweni. In fact, debt to GDP could hit 80% in the next 10 years. The status quo is not an option and everyone – parliamentarians included – would have to tighten their belts. The country may enter a debt trap, and ratings agencies are ready to pounce unless more radical action is taken. The public sector wage bill must come down.

Says Maarten Ackerman, chief economist at Citadel:  “The elephant in the room is quite obviously the public sector wage bill, which is currently the largest of all the OECD countries relative to GDP, accounting for 46% of all tax revenue in 2019/20 as a result of years of an increasing public sector headcount and above-inflation wage increases. Mboweni pointed out that adjusting for inflation, the average government wage has risen by a shocking 66% over the past 10 years – completely disproportionate to increases in the private sector, and without achieving a commensurate rise in productivity.”

KZN’s amazing agricultural recovery, while poor rains delay plantings elsewhere

Written by Ciaran Ryan. Posted in Journalism

No need for panic yet, say farming experts. From Moneyweb.

The increased plantings planned for the coming period could result in a good harvest and a drop in commodity prices. Image: Shutterstock
The increased plantings planned for the coming period could result in a good harvest and a drop in commodity prices. Image: Shutterstock

The farming sector in KwaZulu-Natal (KZN) is growing at a 12% clip thanks to good rains, while the country’s key maize growing areas have delayed plantings due to the unseasonally dry weather.

Dawie Maree, head of information and marketing at FNB Agriculture, says the resurgent KZN farming sector contributes about 4% to the province’s GDP.

A report last week by Agbiz chief economist Wandile Sihlobo says despite late rains, summer crop farmers are still upbeat about the prospects for the coming season, and plantings are expected to be the highest in the last three years.

Expectations are that plantings will be about 7% higher than last year, or roughly 3.9 million hectares, driven in part by better domestic market prices for maize, sunflower seed, soybeans and groundnuts.

Farmers, however, are delaying plantings as a result of low soil moisture and the late arrival of seasonal rains on the Highveld.Read: Farmers raise alarm on drought threat, seek aid

“There are prospects for good rainfall in the first week of November 2019,” says Sihlobo. “In fact, the next three months might bring sufficient moisture in most parts of the summer growing areas of South Africa. The South African Weather Service forecasts above-normal rainfall in the central to eastern regions of South Africa between November 2019 and January 2020. This could help boost soil moisture and thereafter plantings and crop-growing conditions.”

While KZN’s agricultural sector is recovering from a severe drought, growth in the rest of the country is more pedestrian, with single-digit growth in the first half of this year. Maree says good rains have helped sugar crops on the north and south coasts. Dairy and irrigated maize in the Midlands region have likewise been helped by decent rainfalls in the previous production season, boosting cattle and commercial poultry production inland.

Read: Solar-irrigated farms face an unexpected threat in Zimbabwe: hungry elephants

Large tracts of land previously under sugar in KZN have been turned over to more profitable macadamia and avocado plantations. According to Macadamia SA, 90% of production is being exported, mainly to China.

Maree says the agricultural potential of the province is still growing, due to the availability of underutilised arable land in tribal areas.

Avocados are selling for between R80 to R140 per 16kg bag, with rising export demand from Europe, the Middle East and the soon-to-be-developed Far East market.

Key risks for farmers:

  • Land reform and expropriation without compensation is one of the key risks, and there is little that farmers can do to mitigate this, says Maree. “We consider the new policy on land a risk for agriculture but are not overly concerned at this stage. We do expect more clarity around March next year.”
  • Climate change is another risk, and one that farmers are better able to manage. Following the 2016/17 drought, farmers diversified both products and geographical areas. Small-scale farmers are less equipped to diversify geographically, but most have already diversified into new crops to mitigate climate risks.
  • Cheap imports of sugar and milk. There is heightened risk of cheap sugar imports from South America and neighbouring countries, while dairy imports are reportedly flooding through KZN ports – particularly long-life milk, which enters the country tariff-free, while milk powder and cheese carry tariffs of roughly R4.50 a kilogram.
  • Livestock prices took a knock following the outbreak of foot-and-mouth disease in January this year. The country has excellent poultry farmers, but they are battling dumped products and increasing feed costs.

Assuming late but otherwise normal rain patterns, Agbiz says the increased plantings could result in a good harvest and a drop in commodity prices.

In the case of major crops such as maize, the last time SA planted a large number of hectares close to the 2.5 million hectares intended by farmers this season was in the 2016/17 production season. This was accompanied by a record harvest of 16.8 million tonnes. This does not necessarily mean the coming harvest will match or exceed this prior level, but is an indicator of what could happen.

KZN’s agricultural recovery, despite the headwinds, is still poised for growth and an even greater contribution to the national GDP, says Maree.

Soweto residents to take Eskom to court

Written by Ciaran Ryan. Posted in Journalism

To prevent township from ‘sliding further into lawlessness’ over electricity disconnections. From Moneyweb.

‘Meaningful engagement’ between the parties with a view to drawing up a binding policy framework that reduces power disconnections is proposed. Image: Waldo Swiegers, Bloomberg

‘Meaningful engagement’ between the parties with a view to drawing up a binding policy framework that reduces power disconnections is proposed. Image: Waldo Swiegers, Bloomberg

Several hundred Soweto residents, led by the Lungelo Lethu Human Rights Foundation (LLHRF), are planning to haul Eskom before the South Gauteng High Court to stop the electricity utility carrying out what they say are arbitrary and discriminatory electricity disconnections.

LLHRF intends asking the court to compel Eskom to set up a fair and independent tribunal to adjudicate the complaints. Summons will be served on Eskom in the coming weeks.

Eskom’s annual report says it is owned R18 billion in unpaid electricity bills in Soweto alone, out of a total arrears bill of about R40 billion.

In the last few days President Cyril Ramaphosa issued a public letter calling for an end to the culture of non-payment that worked so well in bringing an end to apartheid, but “has no place in present-day SA. If public utilities like Eskom are to survive, then all users need to pay for the services they receive.”

Speaking at the recent Joburg Mining Indaba, Eskom acting CEO Jabu Mabuza also called for an end to the culture of non-payment that had contributed to Eskom’s dire financial situation.

By some estimates, just 10% of residents are paying for electricity in Soweto.

The notion that Soweto residents are wilfully delinquent is challenged by LLHRF president King Sibiya. “Our main objective in bringing this court action is to stop Soweto sinking deeper into lawlessness. Social protests are escalating and recently this resulted in the tragic death of two workers. We have held numerous forums in Soweto and have heard complaints from residents that Eskom is disconnecting residents without just cause.

Paying customers also affected

“Some residents who are dutifully paying their electricity bills have been disconnected, and others who are entitled to free or subsidised electricity are also being disconnected.

“Our request to the court is very simple: establish a tribunal to hear the individual merits of each complaint before deciding to disconnect power from people who are often living in desperate circumstances.”

Soweto is supplied with electricity directly by Eskom, and not City Power, which supplies most of Johannesburg. City Power has established channels for resolving customer complaints, largely due to various high court decisions in recent years. However Eskom is not subject to the same legal requirements and is therefore able to act with impunity when deciding to disconnect customers, says Sibiya.

He adds that Eskom’s claim that Soweto residents are R18 billion in arrears requires a proper audit.

“Based on our interactions with community organisations in Soweto, we believe this figure may be exaggerated,” says Sibiya. “We are not asking for any freebies for Soweto residents. We support President Ramaphosa’s call for an end to lawlessness and the culture of non-payment. But we want fairness and transparency in the way Eskom treats its customers in the area.”

The Soweto Accord

LLHRF says an agreement was reached in 1992 between Eskom and Soweto residents. The so-called Soweto Accord outlined an 11-point plan whereby Eskom would directly provide the township with electricity, thereby avoiding having to pay local government mark-up fees. The purpose of accord was to bring an end to the rent boycott prevailing at the time and restore a culture of payment within townships. That clearly hasn’t worked.

Sibiya says he decided to get involved when he saw service protests in the township and the destruction of Eskom property and assets. “If we don’t do something about this, the service protests will get worse.”

Some of the key points of the Soweto Accord were:

  1. Residents of Soweto were to receive electricity direct from Eskom with a flat rate of R33.80 per month per household. This flat rate was to be paid until Eskom repaired all meter boxes in Soweto. This was supposed to end the practice of Eskom billing customers based on estimations (a practice that continues til today). Residents complain that they are not being accurately billed for services.
  2. Eskom was to embark on a consumer education programme to explain to customers how billing worked and to assist them in reading their meters. The intention was to assist residents in saving electricity.
  3. Eskom, together with civic associations, would embark on educational roadshows. This did not happen, says the LLHRF.
  4. Eskom would repair all transformers to assist it in reaching its targets in terms of budget and service delivery. The resultant improvement in service delivery was considered a key component of the campaign to restore a culture of payment in the township. This, too, did not roll out as planned.
  5. Poor households were to be extended “a duty of care”, meaning government would subsidise those who can’t afford to pay for services they consumed. Today, Eskom is claiming payment from these same poor people (and the municipality), to the tune of R18 billion.

Soweto’s disputed R18 billion debt to Eskom

“We are willing and prepared to pay electricity tariffs at affordable rates, taking into consideration the fact that unemployment and poverty are at extremely high levels in the township,” says Sibiya.

“Eskom’s unilateral approach to disconnections and billing is unjustified, unreasonable and inequitable. Water and electricity are fundamental human rights as stipulated in the United Nations Universal Declaration.”

LLHRF says the solution is for both sides to engage meaningfully with a view to drawing up a binding policy framework. A flat electricity rate can be agreed as an interim solution. The interim solution depends on the negotiations by both parties.    

“We are also sympathetic to Eskom’s predicament,” says Sibiya.

“There is a debt outstanding. But the chances of recovering this are very low indeed so long as we have antagonism between Eskom and the people of Soweto.

“Criminality is spreading in the township through cable theft and destruction of Eskom’s property. This makes it difficult for Eskom to deliver on its mandate and to achieve its budget. We want to assist them to restore services in the township and bring an end to criminality. This will require the cooperation of law enforcement agencies, community forums and Eskom.

Electricity prices have been escalating at more than 18% a year in recent years. On the current pricing trajectory, expenditure by households will almost double by 2030. This is unsustainable in one of the poorest parts of the country.

Background to the dispute

LLHRF says at the start of winter this year Eskom disconnected electricity to hundreds of Soweto households, schools, churches, business without any notice. The disconnected included people who paying their monthly bills. This was a punitive and blanket response by Eskom to criminals who had stolen cables and destroyed Eskom property.

Soweto has a long history of disputes with Eskom, dating back to the apartheid years.

In the early 1990s, many residents joined the Operation Khanyisa campaign which encouraged the illegal reconnection of electricity.

The campaign justified illegal reconnections based on long-standing claims of massive and indiscriminate cut-offs, including cutting off entire blocks, thereby penalising those who were paying their bills.

According to a University of Johannesburg PhD study on township service delivery protests by Ndanduleni Nthambeleni, the campaign organisers also claimed incorrect billing, cut-offs without proper notice, unserviced and faulty meters and the lack of concessions for the poor, the disabled and the unemployed.

LLHRF says it approached Eskom on behalf of the community on numerous occasions, and was informed by Eskom management that it cannot reconnect electricity without an audit. “We sent petitions and memoranda to Eskom, to no avail,” says Sibiya.

Eskom is demanding R6 500 for reconnections and 25% of the outstanding debt as an upfront payment.

“This is clearly unaffordable for many elderly people and pensioners now living without power,” says Sibiya. “Many residents also complain of over-billing, but are unable to have their voices heard by Eskom.”

LLHRF says Eskom is in violation of the Soweto Accord as well as the Consumer Protection Act, the Municipal Systems Amendment Act, the Promotion of Administrative Justice Act and the Constitution.

Response from Eskom

All Eskom tariffs are regulated by Nersa (National Energy Regulator of SA) and Eskom abides by those tariffs for each category of customers. Customers will therefore pay the tariffs applicable to their category as with all customers supplied by Eskom throughout the country.

Eskom cannot negotiate separate tariffs or have preferential arrangements outside of what is regulated. A fixed charge per household will result in customers paying a fixed amount irrespective of the amount of electricity used. This could lead to wasteful usage of electricity. Above all, this will cause network overloading and hindrance in providing good service to customers. Eskom’s lifeline tariffs are Homelight 20 A and Homelight 60 A.

The lifeline tariffs are meant to provide a basic electricity service at a subsidised rate to those who cannot afford to pay the full tariff.

The current inclining block tariff (IBT) is provided to all residential customers, and therefore provides a subsidy to all low-consumption residential customers.

Eskom has a yearly customer education schedule for various communities including Soweto. The programme focuses mainly on the safe use of electricity, how to use electricity wisely and efficiently, the IBT, free basic electricity (FBE) and other electricity-related information that is of benefit to customers.

Eskom is not in a position to continuously provide services in areas where the residents are not paying for their electricity. 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.

Eskom maintains and replaces failed infrastructure on a regular basis due to overloading caused by illegal connections. This is not sustainable and a PFMA [Public Finance Management Act] issue while not in line with Eskom’s revenue management practice and efforts to improve on its financial and operational objectives.

In order for Eskom to replace the damaged mini-substation and subsequently restore supply to the area, audits have to be conducted on the premises that are connected to the said mini-substation or the transformer. The audits will assist in identifying and eliminating the cause of the failure and damages to electricity equipment. During these audits, illegal connections and tampered meters will be immediately removed, customers who have contraventions will be disconnected and a fine of R6 052.60 will be issued to the customers that bypassed meters.

The government assists all qualifying indigent households by providing free basic electricity. This is a programme facilitated and administered by municipalities. Eskom issues FBE to identified customers on behalf of the government.

Eskom is allowed by law to estimate customer readings. The estimations are based on the customer’s consumption when actual readings are taken. Eskom is also able to correct estimations if a customer is over or underestimated whenever actual readings are taken. Eskom meter readers are in some instances unable to enter customers’ premises due to challenges such as locked gates and dangerous dogs. However, customers are encouraged to send their meter readings to Eskom between the 4th and 7th of each month.