Monthly Archives: November 2013

Die Vine Intervention 29 Nov: Credo Quattuor

Food and wine guru Michael Olivier introduces our tasting panel to another fine Cape red – the Credo Quattuor blend. Anchor John Fraser is joined in the Die Vine Intervention Studio by branding legend Jeremy Sampson and Tsogo Sun group sommelier Miguel Chan.


Is Eskom the World’s Worst Company?

Obviously the bunch at Sanral had gone undercover. I assume that is why environmental groups Earthlife Africa, groundWork and Greenpeace Africa have nominated Eskom as the worst corporation in the world, in an awards event to be held at the World Economic Forum in Davos in January. Now Eskom may not be loved, but is it really THAT bad? We asked a few of our experts….

Mike Schussler from economists.co.za:

I am not sure if Eskom is the worst company in the world but their effect on SA economic growth is currently negative. It’s unfair to say they are the worst but it is true that their actions at present are having negative effects on inflation, growth, energy supply and are creating negative views on SA. But the problem is that Eskom does make money, but perhaps not enough to help SA build new power stations on time – and therefore help SA Corp make money and thereby create growth.

Mario Pretorius from Telemasters:

Eskom is the living monument to the policies of the government. Revered as the world’s lowest-cost producer two decades ago, it is now a shambles of short-term profiteering and reflects the disastrous self-serving economic policies of the ANC. These policies of fast-tracking, affirmative action, preferential black suppliers, BEE management, black woman owners’ tender preferences, forced retirement of expertise, preference of social goals, political pussy footing around debtors and a vicious and toxic disregard for basic economic laws makes for an almost fatal crippling of this economic giant. It is not only sad, it is threatening the very survival of the ZA economy. The sudden rush to trillion Rand nuclear power, the meltdown of its ability to manage projects and its inability to deliver electricity reliably, albeit at astronomically inflated prices, shows the dearth of common sense and absence of understanding of the essentials of a proper economy. Eskom deserves this – and in a few years, it will probably achieve the Lifetime Award, if it still exists.

Frans Cronje from the SAIRR:

In many respects, yes. Such rankings are for the most part silly things that contribute very little to our understanding of how the world works. Over the past 20 years, 6 million households have been connected to electricity for the first time in South Africa. Eskom’s expansion plans were initially undermined by the government. It does remain a wasteful monopoly – but that is because this is the policy of the government. It would be more accurate to make the government the beneficiaries of this reward.

Dawie Roodt from the Efficient Group:

Any company that encourages its customers to use less of its products must be totally crazy. So Eskom is a “worthy” candidate for this title. But do not blame Eskom only. The reason why it behaves so irrationally is because its political masters are so fixated on their socialist illusions that Eskom is prevented from acting rationally. Cut Eskom into smaller pieces, privatise it and create a competitive environment and Eskom may well win the award as the best company in the world!

Conclusion: Not sure I would give Eskom the award, but then, apart from Sanral, I am not sure who would beat them into first place……..

Tweet of the Day: Puns s(@omgthatspunny): I used to be a banker, but then I lost interest.

Awesome Todd (@Awesome_Todd): The worst part about being a giraffe is probably having other animals constantly asking you to get their kite out of a tree.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or MC.


New Research Suggests Food Inflation is Twice the Official rate

Many of us feel instinctively that the official CPI inflation rate does not reflect our own experience. I seem to be spending much more on food now than 12 months ago – despite the 5.5% inflation rate. ETM Analytics is working on its own inflation indicator, and ZA Confidential asked Russell Lamberti what it is and what it shows….

ZAC. When did you start this, and what is the aim of the exercise?
RL. We conceived of the idea in early 2013 and started measuring the basket price in March 2013. The aim is to assess how closely an ‘everyday’ shopping basket cost tracks official CPI and retail inflation statistics. South Africans constantly complain that official CPI data doesn’t reflect their personal reality. We’ve investigated Stats SA’s methodologies and find that there are techniques in measuring the CPI that probably bias the measure downward over time. We’ve decided to measure a simple, representative shopping basket over time to see if the price inflation pressures on it validate or challenge the official picture.

ZAC. What is in the index?
RL. There are about 20 grocery items in the basket (things like bread, chicken, soap, toothpaste, coffee, rice, maize meal, milk and so on). There is a mix of basic necessities and less necessary goods like chocolate and coffee. We’ve chosen to always buy the same brands, and we’ve chosen the most popular brands. Popular brands are less prone to price volatility and are highly purchased, making the basket that much more representative.

ZAC. How reflective is your index of the average South African shopper? Is there a type you can identify who would match the index quite closely?
RL. We track a very standard shopping basket at PnP, Checkers, Spar and Woolies stores in Fourways. The stores typically price their products on a national basis, although store managers in some instances do have some discretion here. Fourways is a good choice because a) it is close to our offices:) and b) it is a confluence of the middle income suburbs of Fourways, the high-income Dainfern, and the low income Diepsloot. All these income groups shop in Fourways. So we think the basket is a good representation of simple ‘retail’ inflation that most shoppers experience. We’ve kept our basket simple and included items which, on the whole, rich and poor households all buy.

ZAC. What has been the movement so far?
RL. The index is up 9.2% from March to November 2013. So that is 8 months’ worth of data. If you had to annualise that, it would be an annual shopper’s inflation rate of 14.1%, which is more than double the current official rate of CPI inflation and also other official measures of retail inflation. There is potentially some seasonal caveats to this, so we reserve full judgement on the y/y figure until March 2014 when we have a complete full year picture. Nonetheless, the basket inflation is quite startling so far and I think far more in line with people’s intuitive sense of price escalation in their everyday expenses at the shop.

ZAC. Any big movers?
RL. Chicken has been a big mover. This is due to ‘ordinary’ inflation but also the result of tariffs on chicken imports. Coffee, olive oil and salt are also up strongly, but there has actually been a broad-based increase in prices in the basket. 12 of the 20 items increased by more than 6% in just 8 months, or over 9% annualised. Of these 12 items, 6 are up by over 15% annualised. 5 items of the 20 are the same or lower in price than they were 8 months ago.

ZAC. Why do you think your index seems to be rising much faster than the official CPI index?
RL. Not an easy question. Official CPI is a much broader basket, covering school fees, rent costs, transport costs, energy costs and so on. It’s possible that there is less cost escalation in these items than in grocery items – we still need to investigate this further. Additionally, Stats SA weights its basket heavily toward highest 20% of income earners who tend to spend a lower proportion of their incomes on groceries, but this is clearly not a broadly representative approach of most South Africans. Finally, we need to remember that the CPI inflation rate presently is a y/y measure, while the ETM basket only has 8 months’ worth of data – we’ll have a more accurate comparison in March 2014. But certainly if we see the ETM basket inflating in price much more than the official CPI for a prolonged period of time it would raise some red flags on the CPI methodology. The strength of the ETM basket methodology is its simplicity – it measures the cost of buying the same 20 broadly representative items at four nationally representative major retailers in a busy and demographically diverse retail precinct.

ZAC. Are there lessons to be drawn from your findings?
RL. The most important lesson at this stage is that people’s intuitive concern about their daily shops rising in price much stronger than inflation seems to be correct. Over time we will be able to draw out more and more lessons. If indeed Stats SA does systematically underestimate the extent of inflation, this has profound implications for monetary policy and wage bargaining. The ETM basket does not purport to be the definitive answer to these questions, only to provide another interesting and objective measure of price inflation that can inform this debate. We have however done other, proprietary work for our clients which shows that broad-based inflation in South Africa is considerably higher than the official CPI data reports.

ZAC. Do you think policy makers should/will pay attention to what you are doing?
RL. Yes, over time I believe they will. We know that the ETM basket price index will take time to gain traction and credibility. We’d certainly like to run it for at least two years before we start placing greater confidence in it, so by March 2015 we think it will tell an interesting story and be a very useful cog in the inflation debate. ETM is well-respected by our clients and policy makers alike, and so this is certainly an area of research that I think policy makers will pay more and more attention to in the coming months and years.

ZAC. Is there a long-term strategy for this exercise?
RL. In a sense yes, but we’re also just letting the data emerge month by month for now. Let’s get to March 2015 and have two solid years of data under our belt and then we can assess things from there. Certainly as a broader concept of understanding the true loss of purchasing power of the currency, which is really what inflation data should be capturing, ETM is committed to feeding information to our clients that gives the most accurate picture possible. As they say, a huge part of investment success is exploiting the gap between perception and reality. To the extent that inflation reality is strongly divergent from inflation perceptions, there is an opportunity to be exploited for investors.

Conclusion: Bravo ETM. A useful, interesting and informative initiative. One to watch!

Tweet of the Day:
Puns (@omgthatspunny): Class trip to the Coca-Cola factory. I hope there’s no pop quiz.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.


Terrible GDP Numbers

The economy is growing, but so slowly that it is not going to make much difference. The annualised third quarter growth figure has come in at 0.7%. We are worried, but what about our experts…..?

Dawie Roodt from the Efficient Group:

Average growth for the first three quarters now stands at 1.9% – probably the reason the SARB lowered its forecast for the year to 1.9%. That also means that if growth comes in at below 1.9% for the final quarter, then growth for the year will be below 1.9%. And as things stand, weak demand, strikes on the mines and the "normal" structural problems in the economy, mean growth in the 4th quarter is quietly likely going to be sub 1.9%. Under these circumstances, monetary policy is rather ineffective to support the economy any further. What we need is better labour relations, an efficient state, and clear macroeconomic policies – but for that we need solid political leadership…

Ian Cruickshanks from SAIRR:

This latest number of 0.7 percent quarter on quarter is very disappointing, when compared to Q2’s revised 3.2 percent. Manufacturing, which is 15 percent of the economy, was down . Strikes, particularly in the motoring industry, had an overall impact on manufacturing and on the economy as a whole. This could be expected to continue into Q4. I now fear we may not get to 1.9% GDP growth for the year as a whole. The stock market may be booming but it is difficult to consider allocating fresh funds to the market with the economy in this state.

Mohammed Nalla from Nedbank:

SA’s GDP printed at 1.8% y/y and 0.7% q/q, below consensus estimates of 2% and 1% respectively. We remained bearish on this data given the torrid Q3 which saw labour unrest impact the vehicle sector, as well as a failure of the mining sector to rebound from an already low base. Retail sales and manufacturing also posted negative surprises during the quarter and as such, it is not surprising to see this filter through to headline GDP.

George Glynos from ETM:

A key factor weighing on domestic output in the third quarter was a prolonged period of strike activity in vehicle production industry, while a weaker consumptive sector is expected to have made a less pronounced contribution to growth relative to previous quarters. The domestic economy is in the midst of a cyclical downswing as the initial support to growth stemming from SARB policy loosening wanes while the subsequent inflationary pressures erode purchasing power. Not only cyclical, but also structural issues continue to weigh on domestic production growth and unless reforms which generate a less hostile business and production environment are implemented, economic growth will struggle to gain meaningful traction. 2014 looks set to be a tough year. Why do I care? A softer than expected GDP number will raise further concern at the SARB as it suggests that the underlying economic weakness is even more pronounced than expected. While this may entice market players to increase calls for a deeper reduction in interest rates, with the ZAR still vulnerable and inflation still sticky the SARB is unlikely to take any policy action.

Peter Attard Montalto from Nomura:

Strike action was a partial bug bear affecting the end of the quarter in particular in the car industry (though that will really probably be felt in Q4 because of the peak of the strike in October). Overall the wage round has progressed with tight bursts of layoffs that have not been overly long lasting in sectors outside the headlines. As such the strike impact has been mainly felt in the very weak manufacturing number and not more widely. Broadly SA has followed much similar patterns to other emerging markets with a weak Q3 as global demand has ebbed and sentiment has taken a knock from the goings on around tapering and the shut down in the US. More broadly we can see the constraints the local economy is under not only the usual structural issues, but also on households’ indebtedness and the slower pace of credit growth. Manufacturing was really the dog of the quarter, though actually its performance wasn’t that different from Q1. The clearly significant volatility in seasonally adjusted output is down to strikes, but even accounting for this we are seeing underlying weakness thanks to slow domestic investment rates and slower export demand. Companies have also been running very low inventory levels (as a % of GDP), which we expect to have been repeated in Q3 when the expenditure breakdown is provided by the SARB soon. That may also be feeding into the volatility of output. We will most likely have to downgrade our 2013 growth forecast to 1.9% from 2.0% previously.

Conclusion: South Africa needs to boost job creation, but it ain’t going to do it at these levels of economic growth. The beloved country must be weeping…

Tweets of the Day:

Funny Tweets (@iQuoteComedy): Diet ideas: Eat whatever you want, and if anyone tries to lecture you about your weight, eat them too.

rob delaney (@robdelaney): Peter Jackson just found a postcard JRR Tolkien wrote his nephew in 1938. He’s turning it into 22 nine-hour films.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.


Why Does Eskom Clobber its Best Customers?

Having done an impressive job of ensuring reliable power supply throughout the Winter, Eskom screwed up last week, declaring an emergency and instructing its best customers – the mines, smelters and so on – to cut back on their power consumption. Once again, we have a clear indication that our lack of generating capacity is a severe brake on the growth of this country, and the fruits of past under-investment are rotten, maggot-infested and cancerous for the SA economy. Should these big, job and wealth creating industries be in the front line when power generation capacity is inadequate? We asked some of our experts…..

Mario Pretorius from Telemasters:
Spreading pain in never easy, and to quote my friend Leon Hart: ‘"Genius has its limitations, but stupidity is boundless". So Eskom and NERSA have driven the cost of alternative energy down, limited the amount of purchases thereof and in general done coal BEE where coal is priced up to 40% dearer. They have shrugged off the damage done to the local roads by coal transporters – and Eskom has revamped its HQ by the billions of rand. Here is the order in which every load-shed must happen:
1. Eskom HQ and regional offices.
2. Government departments, starting with the DME.
3. Provincial departments.
4. National parliament, provincial and municipal offices.
5. All 249 SOE’s.
6. Any residential area with more than 10% in arrears.
7. Shopping malls, in decreasing size.
8. Power to neighbouring countries
9. Residential users – for no more than 60 minutes at a time
10. Any Gupta-owned enterprise. (Maybe this should come first and we’ll be safe for a while.)
In a real emergency, the E Toll gantries, Nkandla municipality, traffic departments, and all political party offices should be switched off. Permanently.

Mike Schussler from economists.co.za
It is easier for Eskom to cut the big users to create savings in demand. But it is certainly not fair, as they could argue that they are at present keeping all our lights on. Rolling black-outs may however have more economic damage – as value-add is often in the areas such as Sandton or the CBD in Metros. Perhaps a rolling blackout that is never longer than 2 hours per area, that rolls across the country on a schedule, might be best. The country does owe the big power users some relief from all the times they have taken the hits. Anyway, Eskom could just allow any industrial customers with extra capacity to supply power and free up the system now. This state monopoly has to think outside of their very narrow box now to help save the country.

Duane Newman from Cova Advisory:
It does not seem fair that industrial users are the target of Eskom, as this impacts their financial viability in the medium term. I do understand it is easier for Eskom to negotiate with large business than municipalities. It is clear that Eskom has negotiated some favourable buy-back deals to make it financially worth it for business in the short term, but it is harming their medium to long term outlooks when Eskom supply becomes unreliable. I do understand that business is starting to have a sense of humour failure on this issue, and it is important that Eskom do come up with alternative plans. Many municipalities are marking up power to consumers and businesses, which is also not sustainable. With Eskom’s IDM programme running out of funding, it is likely that business and households will not be investing in energy-savings devices. It is time that Eskom, the Department of Energy and the Department of Trade & Industry push harder for business to develop Co-Generation projects to develop base-load capacity that can be used by large energy users – and any excess can be sold back to the grid. For this to happen, we need a lucrative incentive programme to stimulate this investment. I have been dealing with foreign investors who would like to invest in South Africa – and the deal breaker is not high levels of crime, poor education, excessive strike action, nor lack of incentives – but is the lack of electricity from Eskom and lack of gas from gas suppliers like Sasol.

Peter Attard Montalto from Nomura:
I think it’s a big challenge to decide who gets cut and who not.
Arguably the best way, economically – to ensure investment and job creation etc, would be to cut households and allow SMEs and big business to be able to still produce. However that’s practically impossible to separate SMEs from households and is also politically impossible to target households. That really only leaves bigger industry to take the strain as most practical alternative. We are talking about a handful of users here where there can be real time Eskom monitoring of usage to prevent shirking. The trouble with asking households to cut is that there is no household by household monitoring or ability technical to cut their usage by say 10% – they can only be asked, implored – and then there is a beggar thy neighbour problem that there is little incentive for any particular household to cut if they assume a neighbour will do it instead. These issues, and the push back by larger users is why when the system is very tight for a prolonged period the chances of deterioration into load shedding (ie from normal through level 1 to level 3 emergency) is actually quite likely. The saving grace last week was that the specific problem was quite easy to fix and short lived. In the new year we may not be as lucky.

Chris Gilmour from Absa Investments:
Not an easy one, and one that changes over time. Had this situation occurred 20 or so years ago, cutting residential consumers would have made very little difference, as their collective usage was much lower than it is today. However, with the accelerated rollout of electricity supply to a far greater residential base in the past couple of decades, coupled with virtually no growth in the installed capacity of Eskom, this has meant that collective residential usage as a percentage of total electric capacity is now significantly higher than it was then. So, residential customers should now bear the brunt of power cuts? Logically, probably, yes – but politically this would likely hit a very raw nerve indeed. We only need to cast our minds back to the dark days of early 2008, when Eskom was literally hours away from collapse. Random power cuts affected everyone and the impact on national morale was truly awful. Having said that, when rotational, scheduled power cuts were introduced, people accepted them and in fact began to get used to them. So, if a thoughtfully-invoked rotational schedule were to be enacted, it might just work with the minimum of consumer resistance. Trouble is, this is happening in the run-up to a general election, where the proportion of undecided voters is extremely large. If scheduled power cuts were to be introduced for a few months before April next year, it could play a meaningful role in determining how people vote. Another factor to bear in mind is that our municipal electrical distribution system (mainly residential sub-stations) is so clapped-out that regular power cuts would play havoc with it, as they did in 2008. This could wreak havoc with sub-stations and exacerbate an already parlous situation.

Prof Raymond Parsons, Special Policy Adviser, Business Unity South Africa
Busa does not believe it was appropriate to place the burden of the emergency measures on a few firms – and expect them to take the hit for everyone. It is the household sector, and not industry, that has the high peaks in the morning and the evening that place a big strain on the network. Other methods should be explored to smooth these peaks. Fortunately, Eskom has now lifted the state of emergency under pressure from the companies affected, but that is not the end of the story. We need to look down the road as to what other contingency measures may be needed to keep the lights on in a continuing tight supply situation. Busa considers that the longer-problems that arise from the latest Eskom experience are twofold. Firstly, the uncertain power supply is clearly unable to accommodate planned new investment, a serious bottleneck which has broader economic implications and, secondly, there has been a serious delay in dealing with the ISMO bill in Parliament, which is meant to develop independent power producers. It nonetheless remains a paradox that SA should be experiencing a power emergency at a time when the economy is at a low ebb of only 2% growth this year. We are obviously still facing a vulnerable situation in which to avoid further disruption before new capacity is assured late next year. Conclusion: Industry drives the economy, and I am uncomfortable with Eskom’s current strategy. Not least because it partly conceals the true scale of this country’s energy crisis.

Tweets of the Day:
Ellen DeGeneres (@TheEllenShow): Excited to make fun plans for this weekend. Last weekend, I spent 8 hours organizing my spice rack. Where does the thyme go?
Fake Dispatch (@Fake_Dispatch): Five Habits of Annoying People: 1. Not finishing what they started. 2.
Funny Tweets (@iQuoteComedy): later is the best time to do anything

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address. Upgrade your conference or event by hiring ZA Confidential Editor John Fraser as a speaker or moderator.


Die Vine Intervention. Russo Bordeaux Blend

Michael Olivier introduces to Russo Bordeaux Blend to John Fraser, Branding Icon Jeremy Sampson and Sublime Sommelier Miguel Chan.


Who Will Buy an eTag?

On December the Third, the cost of motoring in Gauteng will shoot up with the activation of new eTolls. The authorities want us all to buy and use new eTags, which will enable them to rake in the cash in real time. But will we oblige? ZA Confidential asked some of our experts what they plan to do….

OUTA chairman Wayne Duvenage:
I will not get an eTag and I will not pay for eTolls. I will defy this unjust policy, along with thousands, if not hundred of thousands, to render this unjust policy unworkable.

Mario Pretorius from Telemasters:

Two phrases spring to mind here. ‘You are not my master but my servant’ defines the principle of democracy. Clearly the tin ears in blue light brigades have lost all sense of reason and responsibility, and eTolls are their latest do-what-I-want stunt. The second phrase is ‘any fool can make a rule and most fools keep to it’. Tolling passageways are ancient sources of friction and war. This one has every odious element possible and I will not support it and hope that every citizen will join in making a stand against wrongheadedness. And I lay a R10 wager that it will not operate on 3 Dec.

Company Director Brand Pretorius:
Although I am still very firmly of the view that an increase in the fuel levy would have been a much more effective way of financing the toll roads, I intend getting an eTag – as I am a law abiding citizen. I also accept the reality that if we want a world class roads infrastructure, we need to be willing to contribute financially.

Jeff Osborne from Gumtree:
I shall not be acquiring an eTag as a matter of principle, and support continued passive resistance. The scheme was ill-considered, is devoid of rationale, and was not transparent. Other obvious collection methods would have fully recovered the cost of the freeway upgrade by now. Never since the apartheid era has there been such unanimous and overwhelming public outrage over an issue. We should not just capitulate because the government has bullied its way forward. This might be a lost battle, but the cause certainly is not. We must continue our united opposition to this undemocratic imposition.

George Glynos from ETM:
I am fortunate enough not to have to use the highway to Pretoria very often so I am not affected much. That said, I will not be buying an e-tag in what will be my small protest at the way in which this has been handled, the inefficient money collection method, the fact that there were alternatives that could have been used to reduce the overall cost, and the arrogant stance of government to push ahead with it despite the public outcry. If the public consultation had been conducted effectively as the government would suggest, then why is the public discontent as acute as it is? This will be a huge test on the government’s ability to manage the process on a very reluctant and potentially uncooperative public.

Duane Newman from Cova Advisory:
While I am not keen to pay eTolls, Government needs to be commended for taking an unpopular decision before the elections. I believe that it is a signal that the government can govern and will stop trying to keep everyone happy through the many consultation processes. I want to thank Wayne Duvenage and Outa for all their efforts in making sure that the eTolls are more affordable. Ultimately we need to pay for our great highways in Gauteng. I suppose I have to go and buy my eTag.

Mario Pretorius from Telemasters:
Two phrases spring to mind here. ‘You are not my master but my servant’ defines the principle of democracy. Clearly the tin ears in blue light brigades have lost all sense of reason and responsibility and etolls is their latest do-what-I-want stunt. The second phrase is ‘any fool can make a rule and most fools keep to it’. Tolling passageways are ancient sources of friction and war. This one has every odious element possible and I will not support it and hope that every citizen will join in making a stand against wrongheadedness. And I lay a R10 wager that it will not operate on 3
Dec.

Ian Cruickshanks fromSAIRR:
I will be buying an eTag. I agree with the user-pays principle, and despite the system’s extortionate cost, the likelihood of fines for non-payment is really not worth considering. I feel I have been bludgeoned into submission. This is typical of our government’s modus operandi.

Mike Schussler from economists.co.za:
I will get an eTag as it will make life easier having one than not having one. I do not agree with a system that finances just one road and is expensive, but I am not going to want to pay more than I have to. Also, I think that the system is easy to evade for people who have no address – while those of us with one are going to get caught in the law’s sights. It will end up making honest tax payers into criminals, while they will struggle to charge those who already do not pay much.

Dawie Roodt from the Efficient Group:
As an economist, I understand the benefits of “the user pay” principle. However, in SA there are a few other variables that must be considered – apart from questions about collections, who has benefitted from the toll-road contracts and the like. Our tax burden has increased quite dramatically in recent years. In the past my taxes were used to pay for infrastructure. But for the past few years politicians “forgot” to spend sufficiently on infrastructure – but increased spending on social/current expenditure. Today we realise that we have neglected infrastructure and need to spend vast amounts of money to maintain our crumbling infrastructure and to provide much needed new infrastructure – unfortunately the money needed for this has already been committed to vote-friendly social/current expenditure. The tolls, therefore, are nothing but a “privatisation” of new taxes. And the opposition to the tolls is nothing but a tax revolt! I will be part of the problem…

Conclusion: It will cost more to use the highways for those without an eTag, and that may be the reason many will sign up. However, there is talk of mass defiance, and one wonders whether there is the capacity to administer the system – if very few use the tags, and payments are slow and reluctant. It will be an interesting launch period!

Tweets of the Day:
Moose Allain (@MooseAllain): I must be ill – I thought I saw a sausage fly past my window, but it was actually a seabird. I think I’ve taken a tern for the wurst.
Puns (@omgthatspunny): I didn’t like my beard at first. Then it grew on me.

ZA Confidential is e-mailed to subscribers. For details on subscription rates, please contact zaconfidential@gmail.com. Media releases, invitations to presentations, and feedback on ZA Confidential can also be sent to the same address.


Some Concerns About Telkom

Given the importance of telecommunications, it would be nice to think that our largest fixed-line provider Telkom would be in good shape, but the news flow has not been all positive, and yesterday’s results announcement was a worry for a few reasons.

1) It may well be that ZA Confidential’s invitation to the Telkom interim results presentation went astray, and I did receive a news release when the results were published. However, a query to the Telkom media office requesting details of the presentation went unanswered, so it is difficult to know what to make of it all. Certainly, I have always believed that it is wise to engage with the media and to be open and available to all. My absence from the presentation is an irritant, but will not stop ZA Confidential from commenting on Telkom.

2) The CFO of a large listed company is a key player in ensuring that the finances are prudently handled and that all the rules of good governance are respected. So what do we make of the latest revelation that Telkom lent R6m to buy shares to its CFO Jacques Schindehütte – while he was being investigated for (as-yet unexplained) misconduct. A former CEO of former Absa, Schindehütte had been seen as a safe pair of hands at Telkom, where management and Boards have been at one another’s throats, the dominate shareholder has been perceived to interfere unnecessarily, and the turnover of CEOs has been precipitous. The sooner this issue is resolved, hopefully with the CFO being exonerated, the better. The current suspicions and speculation are doing Telkom no good, even though it is a healthy sign that this issue has come to light at all.

3) Finally, I worry about Telkom Mobile, which at its launch was called 8ta, and then was bizarrely re-branded. Telkom owned a stake in an established cell phone operator Vodacom, which it sold, before launching 8ta into a fiercely competitive market, with a lot of talented and experienced rivals. A puzzling strategy. Now we see that Telkom is looking at “de-risking” its mobile division, whatever that means. Not the behaviour of a loving and happy parent.

Conclusion:
With Vodacom planning to link up with Neotel, Telkom will be facing a far nimbler and even more dangerous rival – with an offering that would include fixed-line services. As the world moves towards the Netflix model of receiving TV and other data services on the ground and not from satellites, a communications revolution is underway in SA, and a lot will change if we can ever get affordable and speedy broadband to more people. Telkom has such massive assets, and does some things very well, so it will not disappear overnight, and we must all hope that the current cost-cutting and strategising of a very impressive CEO, and sound guidance from an experienced and business-savvy Chairman, will help it to define its true direction, and to learn from many recent mistakes. We will be watching.

Tweets of the Day:
Marl le bean (@Marlebean): I may not be the brightest crayon in the tool shed but at least I’m great at analogies.
Puns (@omgthatspunny): How does Moses make his tea ? Hebrews it.
comedybot (@comedybot): Women like silent men, they think they’re listening. -George Carlin ☺

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Die Vine Intervention 16th November. LadiSmith Brandy.

John Fraser and Michael Olivier are joined for this podcast tasting by Chris Gilmour and Benedicta Dube. The featured bottle is a classy South African Brandy – the LadiSmith 8 year old Pot Still Brandy from the Klein Karoo.


Worrying Retail Numbers

Annual growth in retail sales slumped to 0.2 % in September from 3.2 % in October, well below the consensus forecast of 2.5 %. On the face of it, this is very worrying, but what do our experts make of it?

Nedbank Economic Unit:
Households are likely to remain cautious of spending on non-essential items in the months ahead, given the current unfavourable economic conditions. Today’s numbers provide further evidence that economic growth slowed in the third quarter. We anticipate that the Reserve Bank will maintain its accommodative monetary policy stance well into 2014.

Azar Jammine from Ecometrix:
The strength of the retail sales growth in August had surprised on the upside. At the time, one had suggested that there were factors which had been providing support for retail sales in past months. Firstly, interest rates have remained at current 40-year lows for a prolonged period. Secondly, the continuing growth of the so-called black middle-class has also prevented the growth in consumer spending from declining more sharply. Although this is still small as a percentage of the total population, its growth has been continuing to make a major contribution to overall consumer spending. Finally, the downturn in consumer spending, particularly in respect of durable goods, during the recession of 2009 was so severe, that in certain instances there is still a catch-up replacement demand. Disappointingly, however, the release of the September retail sales data show that y-o-y growth declined sharply to 0.2% in September, from an upwardly revised 3.2% in August (previously reported as 3.0%). This was much lower than consensus forecasts of 2.5% as well as our own forecast, of 2.3%. The September growth in retail sales was also lower than the average growth rate recorded for the first nine months of the year, of 2.7%. M-o-m seasonally growth in retail sales was severely depressed, at -0.7%. Contributing towards the decline in retail sales in September was the fact that rising inflation more generally on the back of the depreciation of the rand exchange rate over the past year has been eroding growth in disposable income. Secondly, interest rates have not declined for a long while. Thirdly, growth in unsecured lending to households has slowed sharply in recent months. Fourthly, signs are beginning to emerge suggesting households are coming under increased financial pressure as consumers are perceived to be carrying high levels of debt and are seeing big increases in their impairments. Finally, growth in public sector employment, which had been a driver of consumer spending, is coming under pressure. It is also conceivable that the effects of widespread strike activity and the resultant loss of pay for striking workers in September had a negative effect on the growth in consumer spending in the month.

The Efficient Group’s Dawie Roodt:
This is a bit of a bummer! It probably means that GDP growth will be closer to 1.5% than to 2%. And, all ratios to GDP (like the fiscal deficit, debt etc.) are all going to go south. This is not good.

Comment:
With very un-festive Christmas trees adorning the malls in the African sun, and mince pies being added to Woolworths’ year-round offering of hot cross buns, one feels for the retailers who must be hoping for a bit of a catch up over the Holy season. However, instinct tells me that Scrooge may win over Santa in Xmas 2013, as retail remains in a rut.

Tweets of the Day:
Puns (@omgthatspunny): Police were called to a day care where a three-year-old was resisting a rest.
Puns (@omgthatspunny): If towels could tell jokes they would probably have a dry sense of humor.
Sea Tea (@Tierno158): When I accused my girlfriend of using too much Botox she just sat there with a frozen expression on her face.
Funny Tweets (@iQuoteComedy): To do list- (1). Go to pet store. (2). Buy bird seeds. (3). Ask how long it will take for the birds to grow. (4). Watch the reaction

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