Furious pushback on mandatory social security plan

Written by Ciaran Ryan. Posted in Journalism

Threats of lawsuits and insults. The government asked for public comment and got it in buckets. From Moneyweb.

One critic points out that the government ‘has a history of failed central management and looting of funds’. Image: Moneyweb
One critic points out that the government ‘has a history of failed central management and looting of funds’. Image: Moneyweb

The Department of Social Development asked for comment around its green paper on Comprehensive Social Security and Retirement Reform – and got it loud and fast.

Of the more than 17 000 comments received by participative democracy platform Dear South Africa, 99% were against what many perceive as yet another tax on a war-weary middle class.

“I think the pushback against this green paper is about as furious as we’ve seen on any campaign we have run,” says Dear South Africa campaign director Rob Hutchinson. “It’s an indicator of how out of touch the government is with the general population. However, it should be borne in mind that this is a green paper and still has to go through a lot of regulatory hoops before this becomes law – which it may not do.”

Read: Mandatory social security plan proposes another tax on the middle class

The green paper proposes setting up a new National Social Security Fund (NSSF) into which employers and employees will have to pay up to 12% of their earnings, with a ceiling of R276  000 per year or R2  760 per month. “This payment will be mandatory, effectively a tax. South African workers will not be able to opt out of paying into this state-run fund,” says the Institute of Race Relations (IRR).

The main beneficiary of the proposed NSSF will be the ANC, says the IRR.

The plan amounts to State Capture 2.0 and will feed the ruling party’s patronage networks by allowing corrupt politicians to tap into large pools of private savings “while providing opportunities to create jobs for pals and family members in the enormous new bureaucracies that will have to be established for nationalising private pensions into the NSSF”.

‘More power to the state’

The Efficient Group’s chief economist Dawie Roodt says the proposal outlined in the green paper is a move in the right direction by trying to consolidate existing systems such as the Unemployment Insurance Fund (UIF), social security grants and the South African Revenue Service (Sars), but that the green paper implies an increase in taxes, with the state handing itself more powers to force working South Africans to save, while granting politicians more power over our savings.

“What’s being proposed is a kind of negative income tax, which is something famed monetarist Milton Friedman spoke about, meaning as you earn less and less you receive income from the state rather than paying it over in the form of income tax, but I don’t see this proposal as being affordable – nor do I see it being implemented.”

‘Illegal and invalid’

Trade union Solidarity says it has started a legal process to stop the proposed NSSF and mandatory state-controlled pension fund in its tracks. It has given the Department of Social Development 30 days to withdraw its green paper, failing which it will continue with its legal process.

According to Solidarity, the publication of the Green Paper in the Government Gazette was illegal and therefore invalid.

The organisation argues that the minister and her department failed to conduct an initial and a final impact study on the implications of the proposed legislation before it had been published, as required by law.

“It is not only the process that is flawed; the content is also irrational and unaffordable,” says Solidarity chief executive Dirk Hermann.

“The minister does not heed the provisions of the Constitution. She simply did not follow the correct procedures with the publication of the Green Paper and must withdraw it immediately. Ordinary hard-working people cannot handle additional tax pressures. The government also has a history of failed central management and looting of funds.”

Read:SA retirement funds at a tipping point

NHI: Where are we today?

The Dear South Africa campaign provides some insight into ordinary South Africans’ anger over the proposals.

“I think it’s unfair on the general public to fund these ludicrous proposals. We are already tax[ed] to the extent that a quarter of our salaries already go towards funding the government,” says one commentator.

Says another: “The fact that [President Cyril] Ramaphosa has not immediately, openly, and publicly repudiated the minister, only means that we should distrust his motive in this matter. The dishonesty of not distancing him from the thinking behind this idiotic policy can actually be construed as his concurrence with it. I have never seen any other weakling as a president who is unable to respond publicly when such an idiotic Green Paper is released under his watch.”

SA citizens are among the most taxed in the world, says another. “[I am] not prepared to pay more tax to assist an inept government, failing at every level!”

The green paper has drawn fire on multiple fronts, from Dr Lumkile Mondi, senior lecturer at the School of Economics and Business Science at Wits University, to Mike Schüssler of Economists.co.za, who says if implemented, these proposals would “improve” SA’s ranking to seventh most taxed country (in terms of personal income taxes) in the world.

Read: A universal basic income grant isn’t the solution

The real solution …

What’s needed is massive job creation to reduce the number of people relying on social security (who now outnumber those who have jobs).

“A job is still the best form of security” says Dr Stephen Smith, senior policy advisor at the Association for Savings and Investment SA (Asisa).

“Social security is a safety net when all else fails.”

He says the Covid-19 pandemic and the consequences of the economic lockdown have highlighted the urgent need for the appropriate social protection, particularly of informal and vulnerable workers.

“We need solutions to provide protection for these workers to provide support through unemployment and saving through to retirement as existing legislation and structures are not designed to cater for their needs.”

More than 4.5m retirement fund members have R45bn in unclaimed benefits – FSCA

Written by Ciaran Ryan. Posted in Journalism

Some 40% of this will likely never be claimed. From Moneyweb.

A search engine has been set up to help beneficiaries track down unclaimed benefits. Image: Shutterstock
A search engine has been set up to help beneficiaries track down unclaimed benefits. Image: Shutterstock

Some 4.5 million retirement fund members were owed R45 billion in unclaimed benefits in 2019, according to the Financial Sector Conduct Authority (FSCA). This amounts to 1.7% of all retirement fund industry assets in SA.

However, it is likely that 40% of this will never be claimed, says Olano Makhubela, divisional executive in charge of retirement fund supervision at the FSCA.

It is reckoned that 17% of the unclaimed benefits are valued at less than R100, making it uneconomic to trace the beneficiaries.

SA’s retirement industry has come under public criticism and court scrutiny over the issue of unpaid benefits.

Read: Urgent application to stop FSCA making senior appointments

As Moneyweb previously reported, pension fund whistleblower Rosemary Hunter, a former deputy registrar of pension funds at the Financial Services Board (now called the FSCA), waged a multi-year campaign within the FSB to force an open and transparent investigation into the cancellation of thousands of pension funds, some of which still had assets in them.

Hunter took her case all the way to the Constitutional Court, but lost in 2017 on the grounds that the FSCA had already launched investigations into the cancelled pension funds.

Read: Pension funds’ landmark legal victory and what it means

ConCourt minority ruling concerns addressed

Makhubela addressed the ConCourt ruling in a presentation to journalists on Tuesday, saying the FSCA had acted on the minority ruling of the judges (who said they would have found in Hunter’s favour) by addressing some of their concerns.

Among these concerns is the conflict of interest in allowing staff of fund administrators to be appointed as trustees of dormant funds without boards, in which role they are supposed to act in the interests of members, but often don’t.

“The FSCA appears to be demanding greater proof that funds have no assets before cancelling their registrations, but from what I can see [it has] not done any more investigations into specific past cancellations,” says Hunter.

“It is at least satisfying to see them doing now what I had tried to get the FSB to do long before I launched my litigation. It is also gratifying to see the FSCA taking action to reduce the extent of the kind of conflicts of interest that riddle the retirement fund industry in SA, by requiring the appointment of independent trustees and auditors, though I think more could be done in this regard – by, for example, prohibiting the use of the same audit firm to audit both the fund and the administrator. That’s a clear case of the fox guarding the hen house.”

Much of these unclaimed benefits tracked by the FSCA goes back to the apartheid years, when workers departed or retired from their places of employment and lost contact with the retirement fund administrators. Some of the funds belong to migrant workers from neighbouring countries, while beneficiaries (though not their dependents) are assumed to have died. Some of the beneficiaries cannot be traced due to poor admin by fund administrators or inaccurate or missing data on members.

Where the benefits are now

At a media roundtable on Tuesday, Takalani Lukhaimane, the FSCA’s manager for retirement fund conduct supervision, said these unclaimed benefits are housed in occupational funds set up by employers for the benefit of employees, or in special purpose preservation funds set up to segregate unclaimed benefits from the rest.

By 2019, some 78.5% of unclaimed funds were housed in occupational funds belonging to 3.6 million members. The balance were in special purpose preservation funds.

The FSCA has up a search engine to help beneficiaries track down unclaimed benefits.

Between 2010 and 2019 a total of R34.3 billion in unclaimed benefits was paid to 1.2 million members.

About 60% of unclaimed benefits in occupational funds belong to those previously working in the mining, motor, metal and engineering industries.

The impact of Covid

Anton van Graan, specialist analyst for retirement fund conduct supervision at the FSCA, said a survey conducted among employers and employees found 47.5% of funds responding to the survey had sought contribution holidays as a result of pandemic-related disruptions such as loss of income or working hours. Some 12 684 employers sought relief, according to the FSCA, for which their funds were required to amend fund rules (or register new rules) to allow for this.

Read: How unclaimed retirement benefits can be put to better use

“We noted that larger employers managed to weather the effects of Covid-19 and continued with the payment of salaries and honouring commitments to preserve fund benefits,” said Van Graan. “The effect on small businesses appeared to be where the most hardship was evident and was particularly observed in most of the umbrella fund arrangements, indicated by requests for contribution relief by employers.”

The greatest number of requests for relief were noted in the manufacturing and services industries, particularly smaller businesses that were participating in bargaining council funds and umbrella fund arrangements.

NW residents appeal court decision handing service delivery back to municipality

Written by Ciaran Ryan. Posted in Journalism

Head back to court in September to appeal judgment handing back control of water and sewage to the ‘dysfunctional’ municipality. From Moneyweb.

The municipal manager was given a jail sentence last year, suspended on condition that raw sewage spilling into two rivers be cleared up within days. It was – but by the residents. Image: Kgetlengrivier Local Municipality website
The municipal manager was given a jail sentence last year, suspended on condition that raw sewage spilling into two rivers be cleared up within days. It was – but by the residents. Image: Kgetlengrivier Local Municipality website

The Kgentlkengrivier Concerned Citizens (KCC), which won a landmark decision in December last year when the North West High Court handed it control of the local municipality’s water and sewage works, heads back to court in September to appeal another decision by the same court handing back services to the Kgetlengrivier Local Municipality.

The original high court decision in December 2020 had municipalities across the country lining up to challenge dysfunctional municipalities and wrest control of services back into the hands of residents. Others opted for more direct action by way of ratepayers’ boycotts.

Read: North West residents take matters into their own hands, and get court’s blessing

The revolt of the ratepayers

The North West High Court handed down a 90-day jail sentence to the municipal manager, suspended on condition that raw sewage spilling into the Elands and Koster rivers be cleared up within 10 days.

That condition was averted by residents, rather than the municipal manager, who was spared the jail time ordered by Justice Samkelo Gura.

The court handed over control of water and sewage services to the KCC, which raised more than R18 million from residents and local businesses to repair broken infrastructure.

Carel van Heerden, head of the KCC, says the area’s water supply was fully functional within weeks of the takeover, and the sewage system – with the aid of local engineers and volunteers – was likewise restored to working capacity.

On May 13, Acting Judge Mahlangu of the North West High Court ordered that the water treatment works be returned to the control of the municipality or its appointed contractor, Magalies Water.

Van Heerden says this judgment has too many errors to be allowed to stand, and will be appealed all the way to the Constitutional Court if necessary.

Back to being without water within days

“Since this latest judgment, we have been forced to hand over control of the water and sewage works to the municipality and its appointed contractor, Magalies Water, and within three or four days we were back to where we were a year ago – with no water in the nearby town of Koster,” he points out.

“The court ignored evidence we provided showing that Magalies Water had abandoned the water works at [nearby] Swartruggens, that it had not ordered the chemicals needed to purify the water, and that raw sewage again flowed from the Koster sewage works into the Koster River after it took over control of the site from 18 March this year,” he adds.

An affidavit by Van Heerden in support of the appeal says Magalies Water and the municipality “did not disclose the records of decision substantiating the lawful, due and proper appointment of Magalies Water”.

He goes on to state that the Kgetlengrivier Local Municipality is in a hopeless state of mismanagement, with the North West provincial administration failing to intervene and remedy the situation with the tools provided it by the Constitution.

The court also erred in assuming that the Kgetlengrivier Local Municipality was in compliance with the order previously issued by Justice Gura, when the evidence suggests this was not the case.

Read: Court orders suspended municipal manager’s reinstatement, mayor to pay costs

Eight respondents are cited in the case, including Kgetlengrivier municipal manager, the executive mayor of Bojanala Platinum, under which Kgetlengrivier Local Municipality falls, Magalies Water Board, the responsible provincial MECs, and the minister of Human Settlements, Water and Sanitation.

The applicants are KCC and Carel van Heerden.

Moneyweb reached out to Magalies Water for comment on the claims made in the appeal papers, but had not received a response by the time of going to press. The article will be updated if and when a response is received.

Van Heerden says the court also erred in failing to order the KCC and its appointed contractor Pioneer to be compensated for expenses incurred in rehabilitating the area’s water and sewage works.

There is also clear evidence that employees of Magalies Water and the municipality had abandoned the (water and sewage) sites from March 18.

Furthermore there is evidence that neither Magalies Water nor the other respondents had placed suitably qualified employees on site from March 18.

The state respondents have yet to file their replies to the KCC appeal.

Read: Emfuleni’s financial distress still far from over

Mandatory social security plan proposes another tax on the middle class

Written by Ciaran Ryan. Posted in Journalism

The government is determined to introduce a comprehensive social security system with a mandatory payroll deduction of 8-12% to help fund the scheme. From Moneyweb.

From state capture to private wealth capture? SA is already dealing with National Health Insurance proposals, the exit tax for emigrants, and the discussion around prescribed assets. Image: Shutterstock
From state capture to private wealth capture? SA is already dealing with National Health Insurance proposals, the exit tax for emigrants, and the discussion around prescribed assets. Image: Shutterstock

SA’s battered middle class got another dose of bad news this week – a green paper on Comprehensive Social Security and Retirement Reform that proposes setting up a new fund that will provide pensions to formal, informal and self-employed workers who reach retirement.

It also proposes providing disability benefits to those physically unable to work, and survivor benefits to their dependants should they not live until retirement.

Contributions to the pension and risk benefit components of the proposed National Social Security Fund (NSSF) will be pooled, with risks being shared between all contributors.

Read: SA proposes mandatory contributions to welfare fund

According to the green paper, the scheme will be funded by way of a mandatory pension payroll contribution of 8-12% of earnings “to be met by employees and employers, at the establishment of the NSSF”.

‘Floor and ceiling to contributions’

“There will be both a floor and a ceiling to contributions: it is proposed that workers earning less than R20 000 per year should not be obliged to contribute to the NSSF, though they will continue to contribute to the UIF [Unemployment Insurance Fund]. Those earning more than the ceiling R276 000 per annum or R23 000 per month, at present will not be obligated to contribute on income above that level.”

At retirement, a worker who contributed to the NSSF will receive a pension calculated according to a formula based on lifetime wages, length of service, and an accrual rate which will determine what percentage of yearly income is paid out.

This would be a defined benefit scheme, meaning pensioners would be paid out at a rate linked to wage inflation rather than at a rate linked to market performance of the amount saved.

Cas Coovadia, CEO of Business Unity South Africa (Busa), says the core proposals in the paper are not new and discussions around this have been going on for several years.

“We would urge government to consider a balanced approach between the public and private sector’s role in a social security system. Any proposed system must build on what we have and must be considered within the context of the serious fiscal crisis SA is in. We also note that the NSSF is proposed as a defined benefit scheme. In this instance, we must protect the interests of younger people and balance these against those already retired.

“We will engage on the green paper but are concerned about suggestions in the document of centralised funds to which taxpayers are asked to contribute.

“SA taxpayers, particularly corporates, are already taxed at some of the higher rates globally and levying additional taxes will be counter-productive to economic growth.”

Adds Johan Gouws, head of advice at Sasfin Wealth: “This green paper comes as a bit of surprise to many of us, coming as it does on top of the National Health Insurance proposals, and the exit tax for emigrants, and the discussion around prescribed assets.”

Read:SA retirement funds at a tipping pointNHI: Where are we today?

“I think we have to be careful we don’t move from state capture to private wealth capture,” says Gouws.

“The middle class is under a tremendous amount of stress at the moment and this proposed mandatory deduction of up to 12% of earnings, paid for by both employees and employers, would place them under even more stress.”

Areas that are lacking

Association for Savings and Investment South Africa (Asisa) senior policy advisor Dr Stephen Smith says the green paper identifies three areas within the public social protection system that are lacking: a basic contributory state pension, statutory health insurance, and adequate income security for those aged 18 to 59.

Smith says it is important that future social security reform programmes build on, rather than disrupt, the existing contractual savings and life insurance arrangements of both public and private sector employees. “It is these savings pools that finance much of the country’s investment requirements and fund South Africa’s capital market.

“A state pension that is used to pool and subsidise risks between workers has to be balanced against what proportion of income remains for the funding of an adequate pension related to an individual’s accustomed standard of living.”

Existing contributors to retirement savings funds are already struggling to preserve what they have accumulated, asking for access to their long-term retirement savings.

The interests of the young

As a defined benefit scheme, a percentage of contributions made today will be used to fund those who have retired.

“The interests of the future young need to be protected against what is viewed by our actuaries as a strong likelihood of ever-increasing contributions to fund benefit promises,” says Smith, adding that it is important to have clarity on how the promises embedded in the design of the NSSF system will impact on the fiscus.

According to Smith, it needs to be ensured that future social security reform programmes do not inhibit employment creation.

“A job is still the best form of security. Social security is a safety net when all else fails.”

Smith says the Covid-19 pandemic and the consequences of the economic lockdowns have highlighted the urgent need for the appropriate social protection, particularly of informal and vulnerable workers.

“We need solutions to provide protection for these workers, to provide support through unemployment and saving through to retirement as existing legislation and structures are not designed to cater for their needs.

“Asisa sees this as the most urgent issue to solve.”

BHP rallies on record dividends as company says goodbye to London

Written by Ciaran Ryan. Posted in Journalism

The London Stock Exchange’s largest company plans to exit fossil fuels and move its primary listing to Australia. From Moneyweb.

The group reported a record $15bn (R223bn) dividend payout for the year. Image: Carla Gottgens/Bloomberg
The group reported a record $15bn (R223bn) dividend payout for the year. Image: Carla Gottgens/Bloomberg

BHP shares rallied 7.4% on Tuesday following the announcement of an 88% leap in underlying profit to $17.1 billion, and a jump of 151% in dividends per share to $3.01.

The jump in share price appears to be a response to good financial results as well as news that the group would shift its primary listing from London to Sydney, and would merge its petroleum business with Woodside to create a global top 10 independent energy company – effectively signalling BHP’s exit from oil and gas to cleaner commodities.

Read: BHP nears oil and gas exit as climate scrutiny intensifies

In what was regarded as the most radical slate of announcements from the company in nearly a decade, BHP also announced the investment of $5.7 billion in the Jansen potash mine in Saskatchewan, Canada.

The decision was influenced by rising potash prices, driven by demand from the agricultural sector. Potash prices are up between 150% and 180% over the last year, depending on the grade, a trend that is likely to benefit in future from mega-trends such as rising population, changing diets and the intensification of agriculture.

BHP and Woodside plan to merge their respective oil and gas portfolios, subject to due diligence, and if successful, the enlarged group would be owned 52% and 48% by existing Woodside and BHP shareholders, and would remain listed on the Australian Stock Exchange.

“The Jansen project offers significant high returning growth optionality in the world’s best potash basin and an attractive investment jurisdiction,” says BHP in its 2021 results announcement.

Activist advice

It appears that BHP has heeded some of the advice of activist investor Elliott Advisors, which has been urging BHP since 2017 to unify its share listings and take other steps needed to unlock $22 billion (R325 billion) in value and improve capital returns.

The first step recommended by Elliott was to unify BHP’s dual-listed company structure into a single Australian-headquartered and Australian tax resident listed company.

Elliott also recommended hiving off BHP’s US petroleum business and listing it on the New York Stock Exchange. The continued inclusion of this in the portfolio obscured the group’s true value.

The demerger of South32 from BHP in 2015 was a step in the right direction, according to Elliott, but the inefficiencies of maintaining a dual listing in London and Australia prevented the group from delivering optimal shareholder value.

BHP shares in London traditionally trade at a discount to the Sydney-listed shares because of lower taxes on dividends in Australia.

Unification process

The unification proposal must be approved by 75% of shareholders, which should be easily achieved given the already visible unlocking of value taking place this week.

The Financial Times reports that existing listing rules in London mean BHP will be removed from the exchange’s blue chip index, and that will prompt many UK shareholders to sell.

BHP CEO Mike Henry told analysts that the costs of unification of the group’s share listings had reduced following the settlement of a tax dispute in Australia.

The one-off costs of unification are likely to be $400-$500 million.

The numbers

Copper production was down 5% to 1.636 kt (thousands of tonnes), in large part due to Covid-related lockdowns in Chile. Total iron ore production increased by 2% to 254 Mt (millions of tonnes). Production of between 249 and 259 Mt is expected in the 2022 financial year. Coal production for the year was down 1% to 41 Mt.

Iron ore’s contribution to Ebitda (earnings before interest, tax, depreciation and amortisation) came to $26.3 billion for the year to June, fattened by a 77% Ebitda margin. Copper contributed $8.5 billion, followed by petroleum ($2.3 billion) and metallurgical coal ($593 million).

The group reported a record $15 billion dividend payout for the year, the latest in a string of bumper earnings announced by miners in recent months. The company used the cash influx to pay down debt by 66% to $4.1 billion.

Source: BHP 2021 annual results presentation

If shareholders approve the unification of the group’s share listings in Australia, this is likely to be effected in the first half of 2022, with the proposed merger of its petroleum business with Woodside to follow after that.

How miners have come to the rescue of the fiscus – and shareholders

Written by Ciaran Ryan. Posted in Journalism

With a massive increase in both dividends and taxes over the last five years. From Moneyweb.

Mining, written off as a sunset industry a few years ago, has rebounded to the delight of shareholders and Sars. Image: AdobeStock
Mining, written off as a sunset industry a few years ago, has rebounded to the delight of shareholders and Sars. Image: AdobeStock

Listed mining companies paid more than R130 billion in tax over the last five years, and are on target to hand over more than R60 billion in 2021.

Shareholders did even better, banking more than R176 billion in dividends since 2016 as miners benefitted from surging commodity prices and a firm grip on cost inflation.

Nearly half of the R45 billion paid in company taxes by miners in 2020 came from less than a handful of precious metals producers – Anglo Platinum, Impala Platinum and Sibanye-Stillwater, though the biggest tax haul came from Kumba Iron Ore, which accounted for nearly a quarter of the total tax paid by listed miners last year.

Trade between China and SA jumped 70.4% in US dollar terms in the first half of 2021, with iron playing a key part in this growth, according to the Global Times of China.

That improvement in trade has been a boon to the South African Revenue Service (Sars) and to shareholders.

Not all of the reported tax revenue would have gone to Sars, given that mining groups listed on the JSE operate in different tax jurisdictions. Most of the declared tax, however, would have been collected by Sars.

Strong tax revenue

According to the Minerals Council of SA, mines paid R27.2 billion in income tax last year (2019: R24.2 billion), and a further R12 billion (R8.6 billion) in royalties.

Interestingly, mine employees paid R26 billion in personal taxes in 2020, almost the same as was paid in company taxes.

According to Minerals Council chief economist Henk Langenhoven, mine product is almost the same as it was pre-Covid, the only real difference being an average 25% increase in the commodity prices most relevant to SA – coal, iron ore, gold and platinum group metals (PGMs).

The tax haul for 2021 from mining companies is likely to exceed R60 billion based on mining results posted so far for the year. This is six-fold the level of tax receipts from miners in 2016 and 2017, and shows the importance of the sector to Sars as commodity prices have come to the rescue of both the economy and the fiscus.

Several mining groups have reported blowout results in recent weeks

Earlier this month, Anglo Platinum announced a 28% increase in metal production for the first six months of the year to June, with earnings shooting up 385%.

Last week, diversified resources group Exxaro reported a 106% leap in headline earnings per share for the half year to June, powered largely by strong iron ore prices.

Also in August, Royal Bafokeng Platinum (RBPLat) announce a 322% leap in gross profit and a 163% improvement in Ebitda (earnings before interest, tax, depreciation and amortisation) for the half year to June 2021.

Read:Anglo Platinum hits that sweet spot at halfway stage

Exxaro expects half-year earnings to double

Royal Bafokeng Platinum rewards shareholders with R1.5bn interim dividend

Source: Moneyweb and company annual reports

Shareholders took home R176 billion in dividends since 2016, and last year alone banked nearly R45 billion, a 500% increase over the R7.55 billion in aggregate dividends paid by listed miners in 2016.

Peter Major, mining director at Mergence Corporate Solutions, last week told Moneyweb that the current leg of the commodity ‘supercycle’ differs from the early 2000s in that mine managers have been far more disciplined in their spending and investment decisions. The previous leg of the cycle was characterised by some awful investment decisions that resulted in nearly $2.5 trillion in projects being written down almost to zero.

Dow Jones Commodity Index

Source: S&P Global

The following chart shows the impact of precious metals producers (mostly platinum) on tax and dividend contributions.

Mining, written off as a sunset industry a few years ago, has rebounded to the delight of shareholders and tax authorities.

The tax contributions and dividends will certainly end 2021 at much higher levels than displayed in the graph below, as several miners have still to report their financial results. Slowing growth in China may put a crimp in the current commodity boom – at least for a while – though the years of judicious capex and cost control means shareholders and Sars should yet be able to count on a few more good years from the mining sector.

Source: Moneyweb and company annual reports

IEC’s attempts to delay local government elections get serious pushback

Written by Ciaran Ryan. Posted in Journalism

Covid is not a good enough reason to delay elections, say several parties joining the IEC’s ConCourt case seeking to delay local elections. From Moneyweb.

In the words of one of the applicants: ‘Any delay plays into the hands of those who wish the current, and, in many cases, dysfunctional municipalities to remain in place’. Image: Rogan Ward/Reuters
In the words of one of the applicants: ‘Any delay plays into the hands of those who wish the current, and, in many cases, dysfunctional municipalities to remain in place’. Image: Rogan Ward/Reuters

The Electoral Commission (IEC) heads to the Constitutional Court this week to ask its blessing in delaying the local government elections from October this year to February 28 next year, citing the difficulties of holding free and fair elections during a pandemic.

Nearly a dozen political parties and non-governmental organisations (NGOs) have been admitted as either intervening parties or friends of the court, most of them arguing against any delays on the grounds that local government is dysfunctional and must be repaired without delay.

The Electoral Commission’s case rests largely on the so-called Moseneke Report, which made various recommendations to reduce the potential for transmission of Covid-19 by, for example, extending voter registration, expanded special voting arrangements for the ill and vaccinations for poll workers. It also recommended delaying the elections from October 2021 to February 2022 as it felt the elections would not be free, fair and safe if held in October this year.

Read: Inquiry recommends SA local government elections be delayed

‘Mischievous’

The Constitution of South Africa requires an election to be held within 90 days of the expiry of the term of municipal councils. The Electoral Commission’s recommended date of February 28 2022 falls outside this 90-day window, which is why it has approached the Constitutional Court for its blessing or, in the alternative, to declare its actions (in delaying the elections) as unconstitutional, but defer the issue any order to this effect after February 28 2022 – which is, in effect, a “mischievous” side-step of the Constitution according to some lawyers involved in the case.

Even the medical experts canvassed in the Moseneke report could not agree on whether the election should be held in October or February next year.

Tim Tyrell, project manager at Organisation Undoing Tax Abuse (Outa), says recent social disruptions in KwaZulu-Natal and Gauteng, including Covid-19, are insufficient justification for delaying the elections.

“While there are challenges to the smooth rollout of these elections, these are far outweighed by the critical importance of holding these elections properly and on time,” says Tyrell.

“There is much that needs urgent fixing in our local government structures, and any delay plays into the hands of those who wish the current, and, in many cases, dysfunctional municipalities to remain in place. The abundance of evidence of widespread corruption, mismanagement and maladministration simply cannot be ignored any longer and therefore it is vital for the nation that local government elections proceed as scheduled.”

Read: To postpone, or not to postpone? Local elections hang in the balance

Tyrrell says the country dare not delay the elections even by one day if we are to fix all that is wrong with our municipalities. “Democracy, like justice, deferred, is democracy denied,” he adds.

Delay would give civil society more time to ‘get organised’

Melanie Veness of the Pietermaritzburg Chamber of Business says though the failure of local government is one of the greatest obstacles facing the country, delaying the elections gives civil society more time to get organised by taking advantage of Section 15A of the Electoral Commissions Act 51 of 1996, which basically says that any organisation can register with the IEC to contest local government elections. They needn’t be a political party.

“It’s time for civil society to stand up and be the change that we need at a local level,” she says.

“We have to get our towns and cities back on the right track. In order to do that, we need leadership that is chosen by, and accountable to, the people.

“Failing infrastructure and poor service delivery makes the operating environment extremely difficult for business to navigate. It’s local government’s mandate to create a conducive environment for business to operate in, and in most cases we’re doing completely the opposite. Unfortunately, I don’t think having the elections now will bring the change and accountability that is so desperately needed.”

Public weighs in

A public participation campaign by Dear South Africa on the issue of delaying the elections elicited nearly 8 000 responses – 63.3% of them against a postponement. This prompted the group to apply to be admitted as a friend of the court to argue against a postponement.

Campaign director Rob Hutchinson says the IEC (Independent Electoral Commission), by asking for a postponement of the local government elections, is in effect asking the court to suspend democracy. “The IEC is asking the court to sanction a delay in the elections until February 2022 or, in the alternative, to declare any failure to hold elections by October this year as unconstitutional and invalid, but to suspend that ruling until after 28 February 2022.

“The ConCourt is being asked to rule on something which is beyond its powers. It cannot suspend democracy by waiving the Constitution because of a pandemic for any period of time.

“Who’s to say we don’t have another Covid variant in February next year, and we are forced to again delay the elections,” says Hutchinson.

Mandla Mpempe of the Centre for Good Governance and Social Justice says the group is likewise opposed to the postponement of the forthcoming local government elections.

‘This is a manageable situation’

“We all appreciate the impact that the Covid-19 pandemic has on the communities. However, this is a manageable situation,” says Mpempe.

“Putting proper plans and systems in place can mitigate the possible risks. The IEC could amplify its Code of Conduct for the local government elections to insist that Covid-19 protocols be observed in the run-up to, and during, the campaigns and on election day. The IEC could also hold the elections over an extended period of say two days.”

Mpempe says many of the current crop of councillors are in any case guilty of human rights abuses in that they failed to provide basic services to communities.

Extending their term beyond October 2021 will be tantamount to further subjecting the communities to squalor and degradation.

Arguments from court applicants

Council for the Advancement of the SA Constitution (Casac) executive secretary Lawson Naidoo says Casac is arguing that the commission essentially seeks an opportunity to conduct non-pandemic elections and that it has not explored what free and fair elections under pandemic circumstances look like.

John Endres, CEO-elect of the Institute of Race Relations, which has applied as a friend of the court, argues for staggered election dates due to the varying peaks and troughs of infection in different provinces. Endres calls on the ConCourt, if it rejects the commission’s case, to dismiss the case and hold the commission accountable to do its job.

AfriForum’s manager of local government affairs, Morne Mostert, argues: “… it is beyond any debate that the extent of poor service delivery by many municipalities across the country and a failure by local government to fulfill its constitutional mandate in many respects, in itself infringes the fundamental rights members of the public on a large scale. This includes the right of dignity and the right to livelihood.” He further argues that the only way to hold delinquent municipalities accountable is to elect new municipal councillors within the time frames allowed by the Constitution.

Johann Kriegler, chair of Freedom Under Law, and a former ConCourt judge, has applied to make submissions as a friend of the court. He says:

“In essence, the Electoral Commission asks the court to grant it a court-sanctioned mandate to infringe the Constitution, in advance of its intended infringement.

“I am advised and submit that it would not only set an incorrect precedent, but a dangerous and far-reaching one, were it to be granted.” The ConCourt is the guardian, not the source of the Constitution, and it cannot grant the relief the commission is requesting. Hundreds of elections have been held around the world during the pandemic, but the commission is asking the ConCourt to make an exception in this instance when it has had more than a year [since the pandemic was declared] to make contingency plans.

The Western Cape MEC for local government has filed notice with the court that it will oppose the commission’s application for a delay.

Yasmin Duarte, deputy secretary-general of the ANC (which has applied to the court as an intervening party), argues that should the ConCourt agree to delay the election, the new election date should be set for no later than April 2022 – not February 28 2022 as the commission has requested. This is based partly on the available scientific data that suggests SA is likely to experience a fourth Covid wave towards the end of 2021.

Philip Machanik, leader of the Makana Independent New Deal (MIND) political party, argues that municipal financial dysfunction is part of a broader picture of failed service delivery and collapsing infrastructure. Alternatives to delaying the election were not fully explored and in the absence of an election, “less regulated” political activity will continue, posing greater risks of spreading the virus.

Werner Horn, the DA’s representative on the National Party Liaison Committee, opposes the postponement of the elections on the grounds that the court lacks to jurisdiction to override the Constitution, and even if it could, this would be permissible where there was no doubt that it was necessary to protect some other central constitutional value. “The commission’s own evidence shows that elections have only caused spikes in infections when they were held when infections were already high, and when large gatherings were permitted. Neither will occur in an October 2021 election.”

African Transformation Movement’s president Vuyolwethu Zungula argues that South Africans are desperate for change, particularly at local government level where corruption is rampant and service delivery is poor. Regular elections are a vehicle for that change. It argues against any delay.

Is the commodity supercycle stalling?

Written by Ciaran Ryan. Posted in Journalism

Slower growth out of China is taking steam out of runaway commodity prices. From Moneyweb.

In the current cycle, most producers are delivering massive dividends to shareholders. Image: AdobeStock
In the current cycle, most producers are delivering massive dividends to shareholders. Image: AdobeStock

The post-Covid economic rebound has hit a speed wobble in the form of slowing Chinese growth.

The World Bank estimates Chinese economic growth to slow to 5.4% next year, from 8.5% in 2021. That expected slowdown has started taking some of the steam out of commodity prices such as rhodium, palladium, oil and copper.

China’s remarkable recovery from the post-Covid crash in March 2020 rescued the global economy, but the looming slowdown will drag the rest of the world with it, particularly commodity-dependent countries like SA.

This could stall one of the longest commodity supercycles in decades as China transitions to slower, more sustainable growth based on domestic consumption rather than exports and investment.

Listen: Deryk Janse van Rensburg of Anchor Capital discusses commodity prices on MoneywebNOW

Decades-long supercycle

“This has been the biggest commodity supercycle in history, and it’s been going on for the better part of two decades, but I think it is coming to end,” says Peter Major, mining director at Mergence Corporate Solutions.

“Gravity always wins in the end, and I see commodity prices reverting to their mean before their likely over-shooting to the downside. The current cycle commenced in 2003, and is the longest cycle we have seen since at least the 1860s.”

It’s been a record-breaking year for SA miners like Kumba Iron Ore, Royal Bafokeng Platinum and Anglo Platinum, and the good times may continue a while longer with miners like Exxaro expecting its half-yearly earnings to double, in large part because of its investment in iron ore mining at Sishen in the Northern Cape.

Read:A scintillating week for the Anglo stable

Royal Bafokeng Platinum rewards shareholders with R1.5bn interim dividendExxaro expects half-year earnings to double

Royal Bafokeng Platinum rewards shareholders with R1.5bn interim dividend

Exxaro expects half-year earnings to double

What’s different about this leg of the commodity cycle is the spending and investment discipline exercised by miners, says Major.

“In the previous cycles of this millennium, miners spent about $2.5 trillion in projects that were almost all written down to zero. This time around they have been far more conservative, investing and expanding much less and in smaller projects with much quicker payback periods and also returning huge cash in the form of dividends to shareholders.”

Supply and demand

Vaughan Henkel, head of equities research at PSG Wealth, points out that higher commodity prices attract additional production, which in turn levels out any supply-demand imbalance. “What this means is that in time, commodity prices will moderate. It’s pleasing to note that during this current cycle, most producers are delivering massive dividends – including special dividends – to shareholders.

“During previous cycles, cash went to capex and mergers and acquisitions, and that didn’t always work out well for shareholders.”

China’s economic outlook is crucial to commodity markets, as the following table shows. Outbreaks of the Covid Delta variant in China have prompted a quick and draconian lockdown by authorities, and this is likely to be followed with stimulus to ensure no economy surprises to the downside.

Despite the growing headwinds in China, Henkel says oil is an interesting case “because capital will be constrained due to environmental concerns, but that may result in higher prices due to a limited supply response, as we have seen”.

“Oil prices may remain elevated as a result.”

Source: Morgan Stanley Research

Blowing off steam

Recent price activity on key commodities shows rhodium dropping nearly a quarter from its May high of $29 000, while palladium is down 12% since April.

Having rallied from a low of $20 a barrel in March 2020 to $74 a barrel, oil also seems to be cycling back some of the recent gains.

The preferred proxy for industrial demand is copper, which rallied from $47 a tonne to $107/t before easing back to $94/t.

The chart below shows coal surging towards levels last see a decade ago. Looking at this chart, it is hard to argue that the supercycle is over, though coal is somewhat of a unique story: financiers have bolted from the sector, making it difficult to get new projects off the ground.

In this sense, the green lobby is a victim of its own success, having chased financiers from dirty fossil fuels, prompting a spike in demand.

Supply has been constrained by heavy rains in Indonesia and Australia, a mine closure in Colombia, a Chinese ban on Australian coal, and strong demand from Asia in the midst of a sweltering summer.

Alternatives to coal are simply not available in the quantities required, sparking intense price competition on the supplies that are available.

SA coal export prices (USD/tonne)

Source: IndexMundi

David Llewellyn-Smith of Nucleus Capital, writing at Livewire, says Opec (Organisation of the Petroleum Exporting Countries) will lift output by 400 million barrels a day (mb/d), while Iran will likely add another 2mb/d in the near future, all of which will land on a global economy that is slowing. US shale oil producers are also taking advantage of recent price rises to ramp up rigs.

Chinese demand has pumped up iron ore prices to their highest levels in history, as the following chart shows. The Global Times of China reports that the Chinese government has taken measures to curtail soaring iron ore prices by, among other things, looking at ways to diversify away from iron ore.

This was reflected in the Kumba Iron Ore results published in the last few weeks, and has also been crucial to SA-China trade.

“In the first six months of this year, trade between China and South Africa soared 70.4% in US dollar terms, followed by trade between China and India with a growth of 62.7%, both outperforming the former’s trade performance with other major trading partners. The iron ore trade is probably a big contribution behind such spectacular trade performance,” says The Global Times of China.

Iron ore price (USD/tonne)

Source: IndexMundi

Anthony de la Cour, investment analyst with Matrix Fund Managers, says iron ore is the most at risk of a correction, as Chinese demand normalises from a period of excessive stimulus and supply comes back online.

“This implies it should trend towards marginal cost of production which is approximately $80/t currently, although it is likely that this will take a number of years. I certainly do not see the likelihood of such low pricing in the near term at all. Likewise, whereas thermal coal is also trading above marginal cost, the barriers to more production are structural and will also take some time to correct. Our expectation is for this to be a two-to-three-year process.

“Finally, we are very cautious on rhodium. Our view is that the heady recent prices are wholly unsustainable but forecasting timing on this is difficult. Whereas as we see more support for platinum and palladium over the medium term, the large contribution of rhodium to the current PGM basket price leaves us currently very cautious about the sector.

“With respect to commodities in general, our view is that we have likely seen peak pricing for now, but capital discipline of mining producers in this cycle leaves us broadly constructive once the recent covid induced demand-supply windfalls have normalised.”

Return of the crypto bulls

Written by Ciaran Ryan. Posted in Journalism

Driven by a new era of high-net-worth capital flowing through to bitcoin. From Moneyweb.

Indications are that trading activity might have wound down in China, but the slack has been picked up in the US and Europe. Image: Bloomberg
Indications are that trading activity might have wound down in China, but the slack has been picked up in the US and Europe. Image: Bloomberg

Bitcoin’s 54% rally to $46 000 in the last three weeks has ignited talk of a bitcoin supply squeeze.

Read:Bitcoin’s rebound to 3-month high has bulls eyeing $50 000 again

Bitcoin roars back, putting $100 000 predictions in vogue again

Analysis by blockchain research group Glassnode shows 12.48 million of the 18.7 million bitcoin in circulation are in long-term holder (LTH) hands.

“This is extremely similar to the volume of coins held by LTHs in October 2020 before the primary bullish impulse started,” says Glassnode.

Long-term holders now account for 82.68% of total bitcoin supply, after removing the nearly 20% of coins that have been lost or are otherwise unrecoverable.

The ratio of short-term holders is currently at 25%.

A drop to 20% would put bitcoin firmly into a supply squeeze situation, which has historically been bullish for the coin.

The data from Glassnode also suggest that new buyers of bitcoin (BTC) have stuck around to become longer-term holders.

A bullish feature of the market is that coins aged between three and 24 months account for nearly half the total bitcoin supply, and that a higher percentage of coin holders appear to be in it for the long haul.

Shift in sentiment

This view is confirmed by a July report from Kraken Intelligence, indicating a bullish shift in sentiment. July was the second month in a row that bitcoin’s price growth (+18%) outperformed altcoins (+7%). Bitcoin’s drop to a low of $29 288 in July triggered a rally that led to a short squeeze, resulting in $2 billion in crypto short liquidations, nearly half of which occurred on July 25 when BTC broke the $40 000 resistance level.

Whales (large holders of BTC) and miners opted to accumulate BTC in July. This reduced the available supply of BTC, signalling a favourable outlook for the coin, says Kraken.

Ethereum (ETH) is up 78% from its July low of $1 776, powered by the general shift in crypto sentiment and technical upgrades to the Ethereum blockchain which is expected to result in up to $40 billion of ETH coins being staked (put to work on the blockchain in return for rewards).

Read: Ethereum’s London upgrade could boost its price through burns

Technical analyst Damanick Dantes, writing at CoinDesk, says BTC’s long-term uptrend remains intact despite the sharp 50% correction from an all-time high of about $63 000 in April. The coin found support at the $30 000 level, but will likely face resistance near $50 000 to $55 000, which could stall the recovery given short-term overbought signals.

Bitcoin is currently holding above the 40-week moving average, which reflects renewed upside momentum, says Dantes. “Bitcoin will need to form a decisive break above $55 000 to fully resolve the selling pressure from May.”

Source: TradingView/CoinDesk

The three-month slump in BTC from its April all-time high above $63 000 has been variously blamed on Tesla CEO Elon Musk’s on-off love affair with the digital currency, as well as China’s clampdown on crypto activity, particularly mining. Blockchain data from Kaiko show trading activity might have wound down in China, but the slack has been picked up in the US and Europe.

Record number of new company registrations in 2020 is a distress signal

Written by Ciaran Ryan. Posted in Journalism

As the 2008/9 financial crash showed, people set up companies when times get tough. From Moneyweb.

People are forming companies to survive, but a host of challenges need to be overcome for a business to succeed. Image: Shutterstock
People are forming companies to survive, but a host of challenges need to be overcome for a business to succeed. Image: Shutterstock

The Companies and Intellectual Property Commission (CIPC) reports that a record 510 000 companies were registered in 2020, a 32% leap over the 385 000 new companies registered in 2019.

That, says CIPC Commissioner Advocate Rory Voller, is not unusual in times of economic hardship.

“We saw this increase in registrations in 2008/9 during the financial crisis. It tells us that people are forming companies out of economic necessity. Many lost their jobs or found themselves working reduced hours or doing part-time work. We have noticed when this happens that people start forming their own companies in order to generate an income,” says Voller.

Those who are registering companies most likely intend to operate in the formal sector, but millions more who have lost either income or jobs end up in the unrecorded informal sector as a means of raw survival.

Pressure

The Small Enterprise Foundation (SEF) provides financial and educational support to informal sector operators. CEO John de Wit says its research confirms the CIPC data suggesting many people who lost their jobs or who are now working reduced hours have entered the informal sector as a way to survive economic hardship. The arrival of new entrants to the informal sector has intensified competition and forced many to shift either location or product lines.

Read: Revenues at 60-70% of pre-Covid level for informal sector entrepreneurs

“I would agree that when times are tough people don’t just sit on their hands, do nothing and hope someone else will save them. South Africans are very entrepreneurial and when the going gets tough, they get going,” says De Wit.

SEF stats show a 6% year-on-year increase in first-time borrowers, which is a proxy for people starting new businesses.

De Wit says while not particularly dramatic, the increase is nevertheless symptomatic of overall demand from new entrants to the informal sector, and might have been higher had SEF staff been able to move more freely through rural areas.

“Something we don’t fully understand yet is that it appears that informal sector businesses are now being impacted by the extended impact of Covid on the economy – in other words higher levels of unemployment and reduced income.

“All in all, the informal sector is going through a very difficult time, likely the most difficult in the 30 years that SEF has been working closely with this sector.”

The SEF’s research shows the informal sector is a giant safety net that directly supports 2.5 million to 3 million people, and many times more than this if dependents are included.

Relief with strings attached

As Moneyweb previously reported, informal sector operators were less than enthusiastic about the Department of Small Business Development’s offer of financial relief to micro-entrepreneurs during the Covid lockdowns in 2020.

A key condition for financial relief was the need for informal operators to formalise their businesses by obtaining permits to operate from the local municipalities, and to register with SA Revenue Services (Sars) and the CIPC.

SEF surveyed its members and found just 12% willing to formalise their businesses in return for cash assistance.

Read: Government’s miserable small business assistance put to shame by private sector

The SEF has disbursed more than R12.5 billion in loans to some 650 000 informal sector entrepreneurs since it was founded in 1992. In the past 12 months alone it disbursed R2.1 billion in 492 000 loans.

It has an astonishingly low bad debt rate compared with banks operating in the unsecured lending space, because all new borrowers are introduced by existing clients and are grouped into cells, each member of the cell guaranteeing the loan repayments of the others. This peer pressure keeps cell members honest and ensures loans are recovered.

For small and medium-sized enterprises (SMEs) operating in the formal sector, a range of other relief programmes were launched by government. The list of qualifying criteria is extensive, often requiring the assistance of accountants.

Changing role of accountants 

Nicolaas van Wyk, CEO of the SA Institute of Business Accountants (Saiba), says many of the organisation’s members have been flat out assisting SMEs to prepare financial statements and other documents for companies in difficulty.

“The SME sector is the real engine of the SA economy, and this is where most of the jobs are created – and destroyed,” says Van Wyk.

“The majority of our members [are] accountants to the SME sector, and they have had to adapt very quickly to the changing needs of business. Any small business faced with a sudden drop in income will have to look at ways to cut costs – and payroll is one of the first things they will look at.

“The role of the accountant is changing from one of bookkeeper and compliance box ticker to trusted advisor. They are having to become experts in survival strategies, and finding new sources of cash flow,” says Van Wyk.

“Every business taking strain at the moment is going to be focused on making it through [to] month-end.

“It does not surprise me that so many new companies are being registered, as this is a sign of the more general stress being felt throughout the economy. Of course, there are pockets of economic activity that are doing well, particularly where online delivery is a possibility. But for most SMEs these are unbelievably challenging times.”

The need to prepare for and recover from disaster

Van Wyk says the double blow of Covid lockdowns and recent riots in KwaZulu-Natal and Gauteng prompted Saiba to prepare a Disasters and Financial Planning Guide for members to assist clients recover from disaster.

It’s a sobering read that advises families and businesses to create evacuation and communication plans in the event that things get out of control, with the main focus on protecting life, health and property.

The harsh reality

Evans Maphenduka, executive coordinator for the Development Microfinance Association (DMA), an umbrella body for several microfinance organisations, says the increase in company registrations shows a trend of despondency among South Africans.

“Covid-19 has ravaged jobs, obliterated savings and left people grasping at straws in their efforts to survive. It is true that more and more South Africans that are losing their jobs, resort to registering businesses in a bid to provide for themselves and their families.

“However, registering a business does not necessarily mean that one will run that business and generate an income,” says Maphenduka.

“Experience has shown that many businesses that are registered get deregistered within three years, for failure to operate and comply with the many complicated statutes. Consequently, the registration of many businesses resulting from job losses is more a distress call that someone needs help than an indicator that more people are going into business.

“Many who register businesses do not even understand what that registration means. They do not have complete information on what registering a business means, least of all, the financial obligations that follow those registrations. Further, many have not had the opportunity to research and develop their business ideas and reduce them to proper and implementable business plans.

“As a result, it is not always true that registering a business is a sign that a new business has gone into operation,” says Maphenduka.

“It may be reasonable to assume that less than 10% of those registrations have resulted in the owners generating an income. The rest of the registrations are just desperate pleas for ideas on how to survive. The country must do more to improve the success rate [of business start-ups].”