Stratum to Sars: You’re not getting your hands on our customer information

Written by Ciaran Ryan. Posted in Journalism

‘We don’t even ask our customers their names.’ From Moneyweb.

Operations like Stratum present a conundrum for the authorities. Image: Chris Ratcliffe, Bloomberg
Operations like Stratum present a conundrum for the authorities. Image: Chris Ratcliffe, Bloomberg

Crypto investment company Stratum – operating out of Brazil, SA, Asia and the UK – says it will definitely not be handing over sensitive customer information to the South African Revenue Service (Sars) should it be asked.

This follows a statement released this week by the three largest exchanges in SA – Luno, AltCoinTrader and VALR – that they had been asked to hand over information on certain customers by Sars.

The supposed purpose of collecting the information is risk analysis, “which will inform the need for future action with respect to crypto assets,” according to a joint statement released by the three exchanges this week.

‘Zero chance’

Stratum founder Rocelo Lopes tells Moneyweb there is absolutely “zero chance” of Sars getting its hands on any of its customer information.

“We purposely structured our international operations in anticipation that this day might arrive,” he says.

“We are an entire crypto-to-crypto organisation, set up to ensure we do not hold sensitive information such as bank account details of our clients, in keeping with the highest global standards of privacy of information.”

Stratum’s SA lead, Carmen Potgieter, adds: “Our head office is in Hong Kong, and we have no relationships with any of the banks that can be disrupted, so if you want to be a client of ours, then you are of course welcome provided you already own crypto.

“We avoid any fiat on-ramps that can be attacked by regulators or banks,” she says.

“That is a key foundation of crypto. Our philosophy from the very beginning is that your cryptos should remain anonymous, which is what was intended at the birth of bitcoin and the blockchain.”

Colourful character

Lopes is a colourful character in the crypto world, often jumping on webinars sporting T-shirts you wouldn’t want your children to see. ‘Fork the banks’ is one of his milder slogans.

Stratum customers need only provide an email (supplying your name is optional), and the company refuses to perform the Know Your Customer (KYC) routine on clients. This sets it apart from other operators in this space.

Lopes previously told Moneyweb that should Hong Kong decide to clamp down on cryptos, the company would find a new jurisdiction that was more sympathetic to cryptos.

Rebellion asset

Says Potgieter: “Cryptos were born as a rebellion against a broken financial system, so it is against our philosophy to pretend we are just another add-on to a financial system that is intent on spying, detailing and gathering information about our customers.

“That is not our purpose and we refuse to do that. Not because we want to encourage criminality, but we do not wish to be agents for law enforcement or tax authorities either.

“They must do their jobs but we will not get involved. Nor are we obliged to.”

Operations like Stratum present a conundrum for authorities. Though it operates in SA, it falls under Hong Kong jurisdiction and technology places it beyond the reach of any national authority.

Stratum offers a bundled investment spread across 14 of the largest cryptos, an advanced wallet where customers can earn interest on their cryptos and earn tokens as loyalty rewards, and an Over-The-Counter (OTC) desk for those who want to purchase large volumes of cryptos.

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

Written by Ciaran Ryan. Posted in Journalism

And they face growing competition from newly displaced formal sector workers. From Moneyweb.

The sector supports millions, including the poorest of the poor who rely on a mix of social grants and whatever they can make on their own. Image: Moneyweb
The sector supports millions, including the poorest of the poor who rely on a mix of social grants and whatever they can make on their own. Image: Moneyweb

SA’s informal sector is the last stop saloon for those who have lost their jobs in the formal sector or are simply unable to find formal sector work.

Research by the Development Microfinance Association (DMA), an umbrella body for several microfinance organisations with a combined clientele of 580 000 outstanding loans, shows R3.1 billion for small business and low-cost housing loans in the 12 months to March 2021.

Bad loan write-offs, however, have hit an all-time high of 4-5%, according to Evans Maphenduka, DMA’s executive coordinator.

“We’ve also seen a deterioration in on-time collection rates, which were at about 99% before the Covid lockdowns, to the current rate of about 88%.”

These are loans, usually, just a few thousand rands, extended to micro-entrepreneurs for the purchase of stock and other essentials.

Also keeping an eye on the state of its membership is the Small Enterprise Foundation (SEF), which was founded in 1992 and has extended more than R12.5 billion in small loans to informal sector operators across the country, creating more than 200 000 jobs in the process.

Covid devastation 

Colin Rice, social performance manager at the SEF, says most members went into complete shutdown at the start of the Covid lockdowns between March and May 2020, but have since resumed operations, albeit at reduced capacity.

A recent survey of SEF members gives a glimpse into the devastation caused by the lockdowns.

The informal sector is a giant safety net that supports somewhere between 2.5-3 million people directly, probably more, and millions more family members. These are the poorest of the poor, relying on a mix of social grants from the state and whatever supplementary income they can make in the informal sector.

This is perhaps the most invisible segment of the SA economy, given the difficulties of measuring and tracking activity among those who operate below the radar of officialdom. Many of those operating in this sector do not want to be hounded by Sars or any of the alphabet soup of agencies supposedly set up for their benefit.

We now have a better idea of conditions in the informal sector, thanks to the work of organisations such as the DMA and the SEF.

Not depending on the state

When the Covid lockdowns were imposed in March 2020, the Department of Small Business Development offered financial relief to micro-entrepreneurs, provided they obtain permits to operate from the local municipalities and register with SA Revenue Services (Sars), the Companies and Intellectual Properties Commission (CIPC), and for the payment of unemployment insurance for workers.

The take-up of the government’s Covid financial assistance was miserable.

A 2020 survey by the SEF among its members found just 12% willing to formalise their businesses in return for cash assistance. The vast majority decided to tough it out without government largesse.

Maphenduka says members businesses that did not register with CIPC, Sars and UIF have not received any Covid business support from the government.

“This has robbed the microenterprise owners of the help and support they would have received if they were recognised as legitimate and treated like in other developing countries by the government. It has further made it difficult for the Development Micro Finance Institutions (DMFIs) to access government grants to further subsidise client costs.”

Read:Covid-19 loan guarantee scheme to ‘oil’ SA economy – Mboweni (Apr 2020)

Demand for Covid-19 Loan Guarantee Scheme ‘remains below expectations’ (Feb 3)

SA’s Covid-19 Loan Guarantee Scheme ‘largely dead’ – Intellidex (Feb 22)

Could not operate 

Adds John de Wit, CEO of the SEF: “These Covid lockdowns hit out members particularly hard. In the initial two months, only those with permits from the local municipalities, such as spaza shops, were able to operate.

“When the lockdown restrictions were eased, our members started to operate once again, but our survey data tells us that conditions have not returned to pre-Covid levels. Activity is improving but revenue among these micro-entrepreneurs is at best 60-70% of pre-Covid levels.”

South Africans ply their trade in the informal sector, a loose and broad term meaning virtually anyone making a living outside of formal employment.

This can cover street vendors, hair stylists operating from home or makeshift premises, spaza shop operators, garbage collectors, those renting rooms in their homes, taverners, taxi operators, domestic workers and gardeners, to name a few.

The SEF provides micro-loans to informal sector entrepreneurs across the country, and has disbursed R2.1 billion in the last 12 months, and more than R12.5 billion to some 650 000 entrepreneurs, most of them women, since it was launched in 1992.

Write-offs double 

De Wit says one way to measure the impact of the Covid lockdowns on micro-entrepreneurs is to look at SEF’s bad debt ratio.

“In a normal year, we would write off 1% to 1.5% of our outstanding book due to bad debts. This year, that figure is closer to 3% which is still quite low by normal banking standards, but it tells us that our clients are feeling pain.”

This is slightly below the 4-5% write-offs reported by DMA members. Several microfinance organisations granted borrowers a repayment holiday at the start of the lockdowns and, while the pace of loan repayments has picked up in recent months, entrepreneurs are still left with a backlog that has to be serviced.

These microfinance organisations have succeeded where banks and government bodies have failed.

Borrowers are introduced by existing and trusted clients, which serves as the first line of credit defence. They are then allocated to a cell of five or six other borrowers. Every member of the cell undertakes to cover the loan repayments of the others. This peer pressure keeps cell members honest and ensures loans are recovered.

These organisations target not just the poor, but the ultra-poor: those who live below the poverty line.

Rice says one of the biggest challenges faced by micro-entrepreneurs – quite apart from the lockdown – is the increased competition that comes with more people losing their jobs as a result of lockdowns.

“Not only is there less cash going around, but there is also more competition from informal traders for that cash. Some 25-30% of our members say they are selling different items or have moved locations. Some have started selling from home, and have changed product lines – for example, to selling face masks and sanitisers, to respond to the changing market dynamics.”

Sars turns on the heat, asks crypto exchanges for certain customers’ information

Written by Ciaran Ryan. Posted in Journalism

AltCoinTrader, Luno, and VALR say they have been approached by Sars for information on a small number of customers. From Moneyweb.

Image: AdobeStock
Image: AdobeStock

SA’s three largest crypto exchanges – AltCoinTrader, Luno, and VALR – say they have been approached by the SA Revenue Service (Sars) as part of a tax risk assessment exercise on SA residents involved in “the mining, speculation and/or investment in crypto assets”.

In 2018 Sars released a media statement entitled ‘Sars stance on the tax treatment of cryptocurrencies’ in which it remined taxpayers to declare all cryptocurrency-related taxable income during the year such income was received or accrued.

In a joint statement released on Monday, the three largest crypto exchanges in the country say they have been approached by Sars for information on a “selection of customers in terms of Section 46 of the Tax Administration Act, 2011″.

“Sars has confirmed that the primary purpose of collecting this information is for risk analysis, which will inform the need for future action with respect to crypto assets,” they add.

‘Obliged to comply’

“VALR takes the privacy and protection of our customer data very seriously,” says Farzam Ehsani, co-founder and CEO of VALR.com.

“We are also committed to being compliant with the laws and regulations that govern our business. We have engaged with Sars to express our concern for the privacy of the data of our customers and we have also sought legal advice on our obligation to comply with Sars’s request.

“The conclusion of our legal advice is that per Section 46 of the Tax Administration Act, along with other cryptocurrency exchanges, we are obliged to provide the information requested by Sars.”

Working with Sars to limit the scope

Adds Marius Reitz, general manager for Africa at Luno: “Luno does not share customer information with Sars on a routine or ongoing basis. More generally, and as described in Luno’s privacy policy, we will only share customer data with law enforcement and other regulatory authorities when we are required by law to do so.

“Luno has carefully reviewed the Sars request, taken legal advice on our obligation to comply with it, and worked with Sars to ensure that its scope is limited to the greatest extent possible.

“We are, however, required by law to comply with the request, which is made under Section 46 of the Tax Administration Act.”

Says Richard de Sousa, CEO of AltCoinTrader: “AltCoinTrader has always strived to protect our customers’ privacy and provide the necessary tools to enable compliance.

“In order for the industry as a whole to experience growth, exchanges and industry players are obliged to cooperate with regulator.

“AltCoinTrader has taken legal counsel to ensure that all information requested by regulators is within our legal obligation.”

Cryptocurrency platforms are not yet required to provide customers with tax certificates. In their joint statement issued on Monday, AltCoinTrader, Luno and VALR say they all provide the ability for customers to download their transaction history to prepare any tax declarations that are required.

As exhaustion hits bitcoin price, institutional demand returns

Written by Ciaran Ryan. Posted in Journalism

Institutional flows are picking up after a brutal sell-off in May. From Moneyweb.

Longer term holders of bitcoin tend to be less spooked by these sharp drops in price. Image: Chris Ratcliff, Bloomberg
Longer term holders of bitcoin tend to be less spooked by these sharp drops in price. Image: Chris Ratcliff, Bloomberg

Bitcoin is testing support at $35 000 after a brutal sell-off over the last three weeks. Prices are down 40% since the second week in May, though there are signs of institutional support returning, according to an analysis by blockchain research group Glassnode.

Source: Glassnode

One way to measure institutional demand is to look at inflows to Grayscale Bitcoin Trust (ticker symbol GBTC), which is a way for institutional investors to gain exposure to bitcoin via a traditional security rather than buying it directly. Grayscale Bitcoin Trust takes care of safe storage and custody issues, with much clearer tax guidance and governance oversight.

GBTC typically trades at a premium or a discount to the bitcoin spot price, giving an indication of the strength of institutional support.

Source: Glassnode

In January, GBTC saw inflows of almost 50 000 bitcoin (BTC) while GBTC traded at a premium of 10-20% to spot. That premium disappeared in February and by early May had turned into a discount of -21%. The discount has narrowed to -3.8% in recent days, suggesting that institutional interest has risen as bitcoin prices have fallen.

Another reason for Grayscale’s disappearing discount to spot: the launch of a competitor in the form of Osprey Bitcoin Trust (ticker symbol OBTC), which promises lower costs at 0.49% than Grayscale (2%). Osprey is also more accessible in that it can be purchased inside an existing brokerage or retirement account.

More competition is likely after the Chicago Board of Exchange has started the review process for the first bitcoin exchange-traded fund (ETF) in the US (there are several ETFs already listed in Canada).

Osprey founder Greg King told Seeking Alpha that he is not concerned about bitcoin’s famed volatility, noting that whenever BTC cracks a previous all-time high (as it did last year by climbing through $20 000), the average subsequent return is 900% – suggesting we are still in a bull market that has plenty more to run.

A notable trend in the last few months is the quantity of bitcoin moving from illiquid to liquid, as bitcoin were moved to exchanges (a signal of intention to sell or use as collateral for loans, margin trading and other uses). This should, however, be weighed against a remarkable rate of accumulation over the last two years, as bitcoin moved from weak to stronger hands. The sell-off in May was accompanied by a jump in illiquid coins coming back into circulation, after a year of steadily declining exchange liquidity, as shown in the graph below.

Source: Glassnode

“On the exchange front, there was a huge deleveraging in derivatives markets which created a cascade of market selling, margin calls and liquidations. From the $27.4 billion peak in futures open interest set in mid-April, over 60% of open interest has been cleared from the books,” says Glassnode.

Demand for stablecoins (pegged 1:1 with fiat currencies such as the US dollar) shot up during the sell-off, which is indicative of investors parking crypto profits in more stable alternative investments with a view to re-entering the market once crypto prices have stablised. The fact they are parked in stablecoins rather than fiat currencies suggests a pent-up demand to re-enter the crypto markets at lower levels.

An analysis of long-term holders (bitcoin held for a year or more) shows these tend to accumulate during bear markets, with increased selling on any relief rallies. This is something that Glassnode says is a potential to watch for in any rally in bitcoin prices in the coming months.

The market now stands on a knife edge, with unrealised profits and losses held by long-term investors slipping under water. New arrivals to bitcoin in the last few months are suffering the greatest pain, while longer term investors tend to be less spooked by these sharp drops in price, having lived through them before.

A peek into the future of central bank digital currencies

Written by Ciaran Ryan. Posted in Journalism

The SA Reserve Bank is looking into digital currencies for the retail sector, but what will this future look like? Dystopia or financial liberation? From Moneyweb.

The rules around privacy, confidentiality and anti-money laundering measures will need input from all parties. Image: Shutterstock
The rules around privacy, confidentiality and anti-money laundering measures will need input from all parties. Image: Shutterstock

For a peek into the future of money, take a look at what is happening in China.

Earlier this month the Chinese government reiterated its hostility to bitcoin mining while the Central Bank of China ramped up plans to roll out the digital yuan.

The idea behind the digital yuan is to replace cash (which fewer people want to handle post-Covid), clamp down on cash-related crimes, and improve the convenience and costs of transacting.

It’s also been suggested that the digital yuan would give China the upper hand in its trade war with the US, and remove the risk of its SWIFT international bank transactions being wiretapped by the US, as whistleblower Edward Snowden claimed.

Too much (personal) info

Free societies should be wary of China’s motives in introducing a digital yuan.

China may be the most surveilled society in history, using millions of facial recognition cameras to track citizens. It then integrates this with big data analysis and artificial intelligence to come up with a “social score” for every Chinese citizen.

It introduced the social credit scoring system in 2014, issuing demerit points for bad behaviour such as playing loud music, eating on rapid transit systems, violating traffic rules and jaywalking. You can win points back by donating blood, completing volunteer hours or saying nice things about the government on social media.

Add a digital yuan into this stew and the surveillance capabilities are truly terrifying. The Central Bank of China will be able to track citizens’ purchases in real time.

“The digital yuan is both programmable and trackable, giving the Chinese government enormous control over the economy. Not only will Chinese policymakers know every consumer choice made in the economy, but they could also directly affect spending behaviour by making the currency expirable by a certain date,” said Boris Schlossberg, MD of forex at BK Asset Management, according to Bitcoin.com.

Schlossberg adds that this policy objective will backfire, driving more people into cryptos that are outside the reach of authorities.

Though more than 50 central banks around the world are at various stages in researching or planning the introduction of digital currencies, China is way out in front – notwithstanding its hostility to bitcoin.

Bitcoin is the antithesis of central bank digital currencies (CBDCs) – it is decentralised, secure, anti-inflationary and proven itself over 11 years to be a decent, if volatile, store of value.

Read: It’s better to be first on digital currencies

Moves in SA

The South African Reserve Bank (Sarb) recently announced that it is commencing a feasibility study for a general-purpose retail CBDC.

“The Sarb has embarked on a study to investigate the feasibility, desirability and appropriateness of a CBDC as electronic legal tender, for general-purpose retail use, complementary to cash,” says the Reserve Bank in a statement.

“A retail CBDC can be defined as a digital form of cash aimed at providing the best attributes of both cash and electronic payments.

“The objective of the feasibility study is to consider how the issuance of a general-purpose CBDC will feed into the Sarb’s policy position and mandate.”

The study will focus on the issuance of a domestic CBDC that can be used by consumers in SA for general retail purposes.

‘Essential’ for financial inclusion

Sonny Fisher, founder of blockchain company Forus Holdings, argues that CBDCs are essential to achieving digital financial inclusion.

One objective is to replace paper money with digital cash, which should make a significant leap into the promised age of financial inclusion, while reducing the costs of paper issuance, as well as the risks and social impacts.

“We are, however, mindful of the fact that the introduction of digital money poses the potential for the state to intrude on our private lives,” says Fisher.

“This is why the rules around privacy, confidentiality and anti-money laundering measures need input from the entire ecosystem. A failure to address these realities will pose a significant risk to the adoption of digital money.”

Economic impacts

What about the impact of digital money on money supply and inflation?

The tiny Marshall Islands in the Pacific Ocean last year announced the launch of the Marshallese Sovereign (SOV), a digital currency operating on the Algorand blockchain in parallel with the islands’ main currency, the US dollar. The SOV money supply growth is fixed algorithmically at 4% a year to prevent inflation. This percentage growth in money supply cannot be altered by the whims of politicians or budgetary emergencies.

Fisher says the perception that CBDCs or digital money will be able to impact money supply is a misnomer. “Retail currency, both cash and deposits, make up a tiny portion of the money supply. In fact the introduction of a single digital store of value that is interchangeable, will reduce the amount of capital banks, retailers, fintech providers and money transfer agents need to tie up in expensive liquidity pools.

“The introduction of digital currency is guaranteed to increase per capita GDP and stimulate growth among SMEs.”

Sarb study

The Sarb feasibility study will include practical experimentation across different emerging technology platforms, taking into account a variety of factors, including policy, regulatory, security and risk management implications.

“It should be noted that while the CBDC feasibility study is different from [another Sarb-led project called] Project Khokha, which focuses on the settlement of high-value transactions between commercial banks and other stakeholders at the wholesale level, it is expected that the two studies will result in better policy alignment and coordination.”

Trade-off

Monica Singer, SA lead for blockchain company Consensys, says technology always poses a trade-off between added convenience and the potential for official abuse. In the case of CBDCs, protections can and must be put in place to protect privacy and security of citizens.

“For example, the Bank of China proposes tracking all digital yuan transactions of any size. A far more preferable approach is to emulate the Digital Dollar project of the US, which says any transaction below $10 000 should remain private, similar to the use of cash and the KYC [Know Your Customer] requirements.

“With the adoption of a CBDC, the cost of issuing banknotes and coins can be reduced, along with the risk of hijacks that take place on the vans transporting cash and the bombing of ATMs.

“The use of blockchain technology can ensure that taxes are collected in real-time and the complete audit trail is available,” says Singer.

“The Reserve Bank will be able to distribute universal basic income and social grants on a real-time basis, should this be the policy of the government of the day.”

Cooperation

Singer says the implementation of a CBDC should be done in cooperation with the private sector. “It is in the national interest and it requires the public good to be the paramount criteria over the profits that are generated by third party intermediaries. As new payment rails are being created, the citizens should be free to choose what type of money they will want to use. I hope that there will not be wall gardens between the different currencies and a free flow is allowed in the future across borders.

Read: Cryptocurrency banking potential in Africa

“Programmable money will ensure that these funds that are distributed real time directly into the wallets of citizens that qualify or students will ensure that those funds are programmed to be used only for the purpose that they are intended to be used. This is possible because of smart contract functionality in the internet of value, which is Ethereum.”

The ideal role for a central bank is as overseer of the CBDC platform and its governance.

“The banks and other institutions can be the ones interacting with the public to open up e-wallets,” adds Singer.

“I would also like to see that CBDCs are interoperable with other CBDCs so that they are transferable across borders peer-to-peer, no matter where people live. CBDCs should also be interchangeable with other forms of money like cryptocurrencies, stablecoins and the many private coins that will be issued in the future by financial institutions and other private entities like Facebook [with its stablecoin Diem], or fintechs.”

How a tender ‘error’ swung two Eskom contracts worth R341m to the more expensive bidder

Written by Ciaran Ryan. Posted in Journalism

The losing bidder, Instrument Transformer Technologies, faces liquidation as a result. From Moneyweb.

If the company is liquidated, SA will be left with just one local manufacturer of electrical transformers. Image: Bloomberg
f the company is liquidated, SA will be left with just one local manufacturer of electrical transformers. Image: Bloomberg

One of just two local manufacturers of electrical transformers says it faces liquidation after a procurement team at Eskom handed two contracts worth R341 million to the more expensive bidder, which it says should have rightfully have gone to it.

Eskom’s own lawyers have admitted that three contracts for the supply of electrical transformers were awarded to Actom, even though it was more expensive on two of the bids.

How did that happen?

Eskom’s lawyers, Cheadle Thompson & Haysom, in a letter to Instrument Transformer Technologies (ITT) dated February 10, 2021, explain that the record of the tender compiled by Eskom’s procurement team made the most elementary of ‘errors’: the prices recorded for ITT included Vat, but excluded them for Actom.

That was a R341 million (exclusive of Vat) error in favour of Actom on two of the contracts. It was enough to swing two of the contracts from the cheapest to the more expensive bidder.

No need to reconsider 

“Our client [Eskom] does need to reconsider the tenders, and it is the process that is paramount, not the anticipated result. In the circumstances, we ask that your client reconsiders the proposal made to ITT, in particular the proposal that the orders of invalidity be suspended while our client reconsiders the tenders and that your client continues to perform its obligations during that interregnum,” wrote Eskom’s lawyers to both the winning and losing bidders.

The wrongdoing has been admitted, but it seems no serious effort has been made to fix it.

The contracts incorrectly awarded to Actom have not been suspended.

ITT CEO Avi Bhatt believes the reason for this appears to be to let the clock run down on the contracts so that, by the time the matter gets to court, the judges will be presented with a fait accompli.

Moneyweb reached out to Eskom CEO Andre de Ruyter for comment but had not received a reply by the time of going to publication.

Background

Some background here is needed to understand the sequence of events: When it comes to supplying heavy-duty instrument transformers that keep the country’s lights on, there are only two home-grown manufacturers: ITT and Actom.

Both are majority BEE-owned. Actom counts Old Mutual, Actis, Kagiso Tiso Trust and FirstRand among its shareholders.

ITT was purchased in 2017 by Bhatt and his business partner Brian van Wyk.

Both ITT and Actom count Eskom as a major client. The electricity utility accounts for 80% of ITT’s revenue, the balance coming from transformers and equipment supplied to mines, farms, renewable energy producers and others.

Being one of only two original equipment manufacturer (OEM) suppliers in the country, ITT fully expected to count on Eskom tenders to keep it going, provided these tenders met Eskom’s technical, financial and other standards.

It’s not just Eskom that has an interest in supporting local manufacturers of instrument transformers.

Both the Department of Trade, Industry and Competition (dtic) and National Treasury require this type of heavy-duty electrical transformer to have 90% local content, which means in effect that they must be produced in SA.

Only ITT and Actom are capable of meeting this local content standard. Eskom itself required successful tenderers for this type of product to meet the 90% local content requirement or face disqualification.

Two-horse race

So when Eskom put out a request for three quotes (Corp 4 924, 4 925 and 4 952) for instrument transformers in October 2019, this was essentially a two-horse race between Actom and ITT. The combined value of these three contracts came in at about R500 million.

Tenders were to be awarded points on the 90/10 principle: pricing (inclusive of Vat) earning the most points on values above R50 million and, all else being equal, the company with the best black empowerment score winning the tender.

ITT submitted a tender to Eskom, and also provided pricing to various black-owned entities.

ITT was immediately disqualified by Eskom’s procurement team, ostensibly because it provided pricing to multiple suppliers, who in turn submitted their own quotes on the same tenders.

Bhatt explains as an OEM, it is normal business practice to supply prices to companies that may be competing against you for the same tenders. “In any event, this is allowed under Eskom tender rules provided we don’t have a shareholding or JV agreement with the competitor.”

Under review

When ITT was notified that it had been disqualified for sharing information with other suppliers, it immediately informed Eskom that it would apply for a legal review of the tender process.

ITT filed a notice of motion in the South Gauteng High Court citing the Eskom bid evaluation committee and procurement team members Yurisha Pillay Reddy and Lerato Morife as respondents.

Eskom’s lawyers admitted that ITT was prejudiced and was erroneously disqualified, and was the cheaper bid on two tenders (Corp 4 924 and 4 925).

“You don’t make an error of this magnitude where the loser is irregularly deprived of contracts to the value of R341 million,” says Bhatt.

Further oddity

A further oddity in the case: Eskom’s lawyers offered to have the matter settled by agreeing to evaluate the ITT commercial offer, but that settlement was subject to the approval of Actom.

Bhatt says it is extraordinary to seek the approval of the company that is the recipient of irregularly awarded contracts.

“We’re not saying that Actom acted unlawfully, but we are saying that they should not be consulted in rectifying the harm that has been done to us in this case. Why is Eskom asking Actom’s approval when it comes to seeking a settlement with ITT? Eskom has already admitted the prices submitted by ITT were lower and based on Eskom’s own 90/10 rule contracts should have been awarded to ITT. There’s nothing more to discuss.”

Yet, when ITT asked for a full record of the tender process, Eskom supplied some – but not all of it.

Actom itself has asked for a full record to establish what went on in the award of the tenders.

Why the delay?

“To let the clock run down, so the contracts are completed before justice can run its course,” says Bhatt.

“We are facing liquidation, which in itself should be a serious concern for Eskom, [the dtic] and National Treasury. That would leave just one manufacturer of instrument transformers in the country.”

Moneyweb reached out to Eskom with emailed questions on the case, but had not received a reply at the time of publication, despite follow-up. The story will be updated should we receive a reply.

Mining ‘mafia’ wants a piece of Prieska copper-zinc project in Northern Cape

Written by Ciaran Ryan. Posted in Journalism

Not a chance, says project owner Orion Minerals. From Moneyweb.

The Prieska mine is intended to showcase to the world that South African mining is alive and well. Image: Bartek Sadowski, Bloomberg
he Prieska mine is intended to showcase to the world that South African mining is alive and well. Image: Bartek Sadowski, Bloomberg

It started with the construction sector, and has now moved into mining. The so-called construction ‘mafia’ appears to have jumped the fence to mining, renewable energy, in fact anything that can turn a quick buck.

The Prieska copper-zinc project in the Northern Cape is the latest to get a visit from a so-called local ‘business forum’ eager to negotiate its way into the proposed mine’s spending budget.

Earlier this month the mine’s lawyers approached the Northern Cape High Court for an urgent interdict after members of a forum purporting to represent the community, some of them wielding semi-automatic rifles, held protests across Prieska and outside the mine gate.

“We’ve taken a firm stance against those involved in stirring up the local community to disrupt our plans to restart the mine,” says Orion MD Errol Smart.

“They have been telling members of the community that we will not be hiring locals, or using local subcontractors, which is not true. We have always made it clear we will be hiring locally and doing local enterprise development.

Intimidation

“It starts with an invitation to engage from people purporting to represent the local community but they very quickly make it clear that they will get the community to protest unless you give them what they want,” says Smart.

“The people making the noise are probably 100 out of a community of 20 000, and they are also targeting other businesses in the Prieska area.”

Smart says one of the advantages of operating in SA is the ability to approach a court to obtain an injunction to prevent destructive elements from trying to stop commercial development.

“If this was in Democratic Republic of Congo or some other African country, it would be much more difficult to get the support of the courts.

“Once we had the injunction, we were able to get the Public Order Policing Unit to come and disperse the protesters.”

Incidents such as these explain why SA companies attract a discount among foreign investors, adds Smart.

Source of disturbance

The source of this disturbance is the Preferential Procurement Policy Framework Act which allows 30% of all contract value above R30 million on state construction contracts to be allocated to certain designated groups, including black-owned small and medium-sized enterprises.

The regulations do not apply to private sector construction contracts, but this has not deterred local forums who sow confusion over the preferential procurement policy.

DA shadow minister of mineral resources James Lorimer says Orion is one of just a few medium-sized mining projects in SA that is proceeding despite onerous BEE requirements stipulated by the Mining Charter.

“It [Orion] has been at great pains to ensure its BEE requirements involve local people, rather than by empowering black players in the industry who have already been empowered previously. This project and all medium and major mining projects in South Africa are struggling to make the case to international investors.

“If the situation in Prieska is allowed to persist, it will send a signal that mining in South Africa is uninvestible,” said Lorimer, writing in Politicsweb.

Showcase pace-setter

The Prieska copper-zinc mine is a landmark project intended to showcase to the world that South African mining is alive and well.

In a country starving for fresh mining investment, Prieska was the pace-setter.

The ‘mafia’ started showing interest after Australian-based Orion Minerals completed its bankable feasibility study in May 2020.

“It then became clear that we would start appointing contractors and project managers, and this was when the local business forum started to change their previous constructive engagement with us, to unrealistic and unsustainable demands,” says Smart.

The copper-zinc project is a revival of the old Anglovaal Prieska copper mine that closed down in 1991 after a halving in copper prices. Orion believes it has found a way to make the project work using more efficient mine design and improved mining and processing technologies.

The mine will require R4-5 billion in funding, of which 80% will be spent within SA. The feasibility study targets approximately 22 000 tonnes per annum (tpa) of copper and 70 00tpa of zinc in the initial 12-year operating phase, though Smart says a 20-year lifespan seems increasingly realistic as more data comes to light.

Minister of Mineral Resources and Energy Gwede Mantashe is keen to get the project kicked off, given the signal this sends to the rest of the world.

Copper prices have been on a tear since April 2020, more than doubling in price in the last year.

Copper in US dollars, May 2021

Source: ShareMagic

Highlights from the latest bankable feasibility study:

  • 43% increase in pre-tax free cash flow to Au$1.6 billion (R19.2 billion)
  • 36% increase in pre-tax net present value (at an 8% discount rate) to Au$779 million (R9.3 billion)
  • five-month reduction in the capital payback period to 2.4 years; and
  • 6% decrease in all-in-sustaining costs to US$3 531/t (US$1.60/lb) of copper equivalent metal sold.

Bitcoin is in a bear market, but for how long?

Written by Ciaran Ryan. Posted in Journalism

Bull and bear market cycles are getting shorter. From Moneyweb.

There will be some corrections along the way, but with each bear market, bitcoin moves from weaker to stronger hands. Image: Chris Ratcliffe, Bloomberg
There will be some corrections along the way, but with each bear market, bitcoin moves from weaker to stronger hands. Image: Chris Ratcliffe, Bloomberg

Bitcoin (BTC) broke through the 200-day exponential moving average last week for the first time in a year, confirming that a new bear market is now in play.

Bitcoin dropped more than 30% in May, the worst drop since November 2018. In 2019, it traded below the 200-day moving average of three occasions, but has remained above this line for the last 13 months.

Elon Musk may have been the trigger for the latest sharp drop, and in doing so shot himself in the foot (given Tesla’s $1.5 billion purchase of BTC in February), but there were signs of weakness, notably a range-bound market since February. That’s an unusually long time to remain range-bound without a decisive breakout in either direction. The longer the price failed to break out on the upside, the more likely it was to break out on the downside.

Bitcoin breaks down through 200-day moving average

Source: TradingView

Matt Weller at Forex.com points out that the current drawdown is just the third -30% pullback of the current bull market, though measured from peak to trough, the current -55% pullback is deeper than any selloff seen in 2016 and 2017.

He also notes that the price gains in the current bull market cycle are below the historical average “raising hopes that the bull market is alive and well”.

The graph below from Forex.com shows there were seven pullbacks of 30% or more between 2015 and 2017.

The number of 30%-plus drawdowns in bitcoin 2015-2017

Source: StoneX, TradingView

The next graph from Coindesk shows the relative lengths of the bull and bear markets since 2014, which appear to be getting shorter since 2018 (though the latest bull market at 407 days appears to have disrupted this trend).

Billionaires by the fistful

Lukas Wiesflecker at Coinmonks points out the absurdity of the latest bull run that made billionaires by the fistful: There were 69 unicorns in March this year – that is, cryptocurrencies with a market capitalisation of more than $1 billion. By May there were nearly 100.

“Among these unicorns are many more zombies than living ones, more dead and unused blockchains than applications, more failed technologies than breakthroughs,” says Wiesflecker.

Five of the top 10 cryptos trading on the Uniswap exchange were “dog meme” coins with no real utility or technology behind them. Yet they generated $1.5 billion in trade in one day earlier this month.

“When so many unimaginatively set-up s***coins generate so much trading volume — can there be a clearer sign of a bubble?” says Wiesflecker.

Many of these ‘meme’ coins will likely disappear, but some will survive, and there is no certainty that this bubble is anywhere near finished, particularly for established coins like bitcoin and ether (ETC).

Continued adoption

Bitcoin’s continued adoption by institutional and corporate investors looking for refuge from the inevitable inflation that comes with central bank money printing suggests this latest drop is a breather in a much longer bull market still to manifest.

Another point to consider: previous bear markets have been preceded by sharp run-ups in price, followed by a steeply declining drop. That did not occur this time. The run-up was steep, but the drop took months to gestate.

Source: CoinDesk

A review of the historical charts doesn’t quite reveal the despair that trailed the bitcoin crown back in 2015 and again in 2018, when there were dire warnings that the price was headed to zero.

A market analysis by Glassnode suggests that recent bitcoin sellers were mainly newcomers to the market.

Once the price stabilises and there are signs of recovery, yet another generation of retail adopters will enter the market. That may be some time off, but history tells us that will provide impetus to the next bull wave. There will be some aggressive corrections along the way, but with each bear market, BTC moves from weaker to stronger hands.

Lawyers begin worldwide hunt for Lesotho government assets

Written by Ciaran Ryan. Posted in Journalism

German solar power company awarded R856m in damages after kingdom reneged on deal. From Moneyweb.

The Lesotho government did not bother to engage with the legal process. Image: Shutterstock
The Lesotho government did not bother to engage with the legal process. Image: Shutterstock

Here’s a lesson in what can happen when governments renege on contracts.

In this case, solar power company Frazer Solar GmbH was awarded €50 million (R856 million) in damages by a South African court after the Lesotho government reneged on a contract, which was to be funded by the German government, as part of a wider programme to turn Lesotho into a net exporter of electricity.

A binding agreement was sealed in 2018 between Frazer Solar and Lesotho for the provision of up to 40 000 solar water heating systems, 20MW of solar photovoltaic capacity, one million LED lights and 350 000 solar lanterns nationwide.

In a statement issued by Withers Worldwide, the lawyers acting for Frazer Solar, it seems the project stalled in October 2018 when Lesotho’s Ministry of Finance refused to finalise and execute the project’s financial agreements. “Following this breach, Frazer Solar commenced arbitration proceedings in South Africa. No explanation for this refusal [to execute the agreements] has been provided to Frazer Solar by the government of Lesotho, but the resulting legal action concluded that a competing project had been prioritised.”

In March this year, Frazer Solar had completed a similar project in Eswatini, delivering hot water to every single government health clinic.

‘The Government of Lesotho was given an outstanding opportunity to transform access to clean, renewable energy and to eradicate the use of damaging, polluting alternatives nationwide,” says Hussein Haeri, partner and co-head of International Arbitration at Withers LLP.

“Instead, it prevented the project from proceeding, contravened its legal obligations and left Frazer Solar with no alternative than to bring legal proceedings.”

The Lesotho government might want to read up on what can happen when international agreements are flouted.

Assets seized from other countries

In 2012, the Argentine Navy ship Libertad was seized by a court in Ghana after hedge fund NML Capital filed a suit in an Accra court as the ship docked for resupply. NML Capital owned $1 billion in debt that Argentina had refused to pay.

The judge granted the injunction to seize the ship until Argentina posted $20 million to the court in partial settlement of the debt owed to NML Capital. In 2001, Argentina defaulted on $100 billion in debt, but settled 93% of that debt over the ensuing years, but NML formed part of the remaining 7% that had not been paid.

The Libertad was eventually released after Argentina argued that war ships, under a UN convention, are immune from civil claims in foreign ports.

Meanwhile, the US government seized a Manhattan skyscraper worth more than $1 billion belonging to Iran over disputes going back to 1979 and the Islamic revolution when US citizens were taken hostage in the US embassy in Tehran.

‘Liquidated damages’ clause

In a statement issued this week by Withers Worldwide, Frazer Solar “contends that the Government of Lesotho failed to fulfil its contractual obligations under the supply agreement, and in July 2019 gave notice to [the government of Lesotho] concerning the commencement of arbitration proceedings, in line with the dispute resolution mechanism agreed by both parties”.

It adds: “As a deterrent for breaches of the contract, both parties agreed to a ‘liquidated damages’ clause in the supply agreement, which allocated a pre-agreed and capped sum to be paid in the event that either party did not fulfil its contractual obligations.

“The independent arbitrator directed the government of Lesotho to pay Frazer Solar damages of €50 million, in addition to pre-award interest of €754 273, and post-award interest of 1.7% per annum.”

Timeline of events:

  • In November 2017, Frazer Solar submitted a proposal to officials in the Government of Lesotho (GOL) seeking approval for the installation of up to 40 000 solar water heating systems and up to one million LED lights in all government buildings and homes of public servants over a period of four years. The project was funded by KFW IPEX-Bank GmbH, a German export credit agency, with a loan to the value of €100 million repayable over a period of 10 years.
  • On November 21, 2017, Frazer Solar and Lesotho signed a non-binding Memorandum of Understanding for the project.
  • In August 2018, Frazer Solar met with Tom Thabane, then prime minister of Lesotho, and minister in the Office of the Prime Minister Temeki Phoenix Tsolo, to discuss a detailed presentation of the project, setting out the benefits, energy and cost savings it would bring about.
  • In September 2018, following negotiations, a written supply agreement was concluded, signed by Robert Frazer on behalf of Frazer Solar, and Tsolo on behalf of the Kingdom of Lesotho. The financing agreement with KFW would be finalised by the minister of finance.
  • In October 2018, Frazer Solar wrote to the Ministry of Finance to establish the reasons for a delay in finalising the finance agreements. Frazer Solar was told by the ministry that the project required cabinet support and leadership from the Ministry of Energy. However, this support had already been confirmed by the Office of the Prime Minister, which could not explain the ministry’s refusal to execute the financial agreement.
  • In March 2019, lawyers representing Frazer Solar addressed a letter of demand to the office of the Prime Minister calling on the government to remedy a series of breaches of the supply agreement within 60 days. No answer was received.
  • In July 2019, Frazer Solar declared an arbitration dispute between the parties and implemented arbitration proceedings.

Moneyweb reached out to Withers LLP, which said it had no further statement to make on the matter.

A request for comment was also submitted to the Office of the Prime Minister in Lesotho. No reply had been received at the time of publication.

This story will be updated once a reply is received.

What separates the winners from the losers among municipalities

Written by Ciaran Ryan. Posted in Journalism

The biggest winners – including Oudtshoorn, Theewaterskloof, Cape Agulhas and Midvaal – focus on improved revenue collection, reduced wastage, lower costs and improved profitability. From Moneyweb.

Cape Agulhas, where the municipality improved its working capital surplus from R18m to R56m in five years. Image: Adobe Stock Images
Cape Agulhas, where the municipality improved its working capital surplus from R18m to R56m in five years. Image: Adobe Stock Images

Moneyweb asked Ratings Afrika to prepare a list of the most improved and most deteriorated municipalities over five years.

The data is drawn from the Ratings Afrika Municipal Financial Sustainability Index (MFSI) for the fiscal year to June 2020, which examines the 105 largest local municipalities plus eight metros in SA.

The MFSI comprises six financial components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development. Municipalities are scored on a scale of one to 100.

The most improved are Oudtshoorn, Theewaterskloof, Cape Agulhas (all in the Western Cape) and Midvaal (Gauteng).

The most deteriorated are Enoch Mgijima (Queenstown, Eastern Cape), Moses Kotane (Mogwase, North West), Amahlathi (Stutterheim, Eastern Cape) and Gamagara (Kathu, Northern Cape).

Leon Claassen of Ratings Afrika says the most improved focused on doing the basics right: improving revenue collection, eliminating wastage and corruption, and better service delivery – which in turn depends on maintaining and improving infrastructure spending as well as maintenance of existing infrastructure.

Calibre of management

That’s easier said than done when many municipalities have chased away skilled administrators, leaving the door wide open for corrupt and incompetent deployments.

The most deteriorated municipalities often started five years ago with positive working capital balances, but allowed those to fritter away through a combination of ineptitude, bad management, unchecked wastage and sometimes corruption.

Moneyweb has reported on some municipalities that seem to have endless resources when it comes to fighting legal battles to get rid of problematic staff, but very little where it is really counts – in actual service delivery.

The overall state of SA’s municipalities is abysmal, and government will have to pay R51 billion to prevent a total collapse of municipalities and bring them on a level footing to pay their creditors as stipulated by the Municipal Finance Management Act (MFMA).

Reason to be hopeful

Despite the generally sour news at local government level, there are some nuggets of hope to be drawn from this, says Claassen.

“I don’t think we need to completely overhaul local government in SA. We can learn from those that are well managed and replicate their lessons elsewhere in the country.”

He adds: “It is not impossible to fix the problem, but it does take political will and a determination to confront the actual source of the problems at local government level, which is usually the quality of management.”

Source: Ratings Afrika

Ratings Afrika provided a brief summary of the most improved and most deteriorated municipalities, with an explanation for the respective scores.

Losers

1. Enoch Mgijima

Source: Ratings Afrika

With a sustainability index of just nine (out of a potential 100), this municipality is withering into irrelevance or worse, as far as residents are concerned.

It suffers a severe weakening of operating performance and liquidity, with an operating loss in 2020 of R285 million.

The municipality’s liquidity problem is reflected by working capital that went from R155 million positive in 2016 to R357 million negative (cash shortfall) in 2020. Revenue collection was 83% in 2016 (already well below the target 95%) and is now only 74%.

“Very bad financial management but the drought in Eastern Cape might play a role. Perhaps corruption also,” notes Ratings Afrika.

2. Moses Kotane

Source: Ratings Afrika

The municipality’s operating performance is a large contributor to its financial difficulties. It went from an operating profit (surplus) of R7 million in 2016 to loss of R175 million in 2020.

Expenditure growth outstripped revenue growth, indicating no control over expenses, and no financial discipline.

The deterioration in liquidity is even worse. It went from a positive score of 78 in 2016 to negative 22 in 2020. Positive working capital of R260 million in 2016 turned into a cash shortfall of R157 million in 2020, a swing of R417 million in five years.

Revenue collection is disastrous – it went from 80% in 2016 (already below the 95% target set by National Treasury) to just 39% in 2020.

“Not only bad financial management but probably corruption also,” says Ratings Afrika.

3. Amahlathi (Stutterheim)

Source: Ratings Afrika

Operating performance weak throughout the five-year period examined. The operating loss in 2016 was R39 million rising to R48 million in 2020.

Staff costs doubled over five years to R124 million from R63 million in 2016.

Almost no money is being spent or repairs and maintenance. In 2020 the repairs and maintenance spending was just R1.6 million which is less than 0.5% of asset value. It should be about 6% to 8%.

The liquidity deterioration is even worse. The municipality’s working capital was positive in 2016 with R80 million, now it is R81 million in the negative (2020). Revenue collection was at 87% in 2016, slipping to just 66% in 2020.

“Bad financial management all over, though the drought may also have an effect,” says Ratings Afrika.

Winners

1. Oudtshoorn

Source: Ratings Afrika

Oudtshoorn demonstrated good improvement in all the components analysed.

The operating loss reduced from R48 million in 2016 to R19 million in 2020. The working capital shortfall of R116 million in 2016 was turned into positive balance of R48 million in 2020.

The investment in infrastructure went up from R36 million in 2016 to R70 million in 2020, which will result in better service provision.

“Definitely much better financial management,” says Charl Kocks of Ratings Afrika.

2. Theewaterskloof (Caledon)

Source: Ratings Afrika

Good improvement in operating performance. The municipality turned an operating loss of R52 million in 2016 to an operating surplus of R29 million in 2020.

Its liquidity position is much improved, from a working capital shortfall in 2016 of R1 million to a surplus in 2020 of R90 million.

Revenue collection went up from 82% in 2013 to 87% in 2020, though this is still below the benchmark of 95% (though Caledon is a poor area with household income below the national average). There was a slight increase in infrastructure spending from R65 million in 2016 to R72 million in 2020.

Loans valued at R20 million were repaid over the last five years, “reflecting good financial management in difficult times,” says Ratings Afrika.

3. Cape Agulhas

Source: Ratings Afrika

Cape Agulhas showed good overall improvement across the board, with an operating loss of R9 million in 2016 turning into a 2020 surplus of R8 million, while the working capital surplus improved to R56 million from R18 million over the same period.

Revenue collection over five years remained at the target range of about 95%. Investment in infrastructure increased from R20 million in 2016 to R40 million in 2020, meaning better service provision for residents.

This shows a concerted effort from senior management to improve their financial sustainability, says Ratings Afrika.