This article was first published in the third-quarter 2013 edition of Personal Finance magazine.
The machinery of the South African state presents an interesting dichotomy of remarkable levels of efficiency in some areas and shocking incompetence in others. The South African Revenue Service is an example of a government department that works really well, and Home Affairs is improving efficiencies in leaps and bounds.
Then there is the Competition Commission – according to its website, “a statutory body empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers, in order to achieve equality and efficiency in the South African economy”.
The Competition Commission is arguably one of the most efficient arms of government and is raking in millions of rands for the exchequer. It astounds me how efficient this watchdog is at uncovering and punishing “corruption and collusion” in the private sector. Public quoted companies have been heavily punished. Just look at two penalties imposed by the Competition Commission this year: R323 million on the Stefanutti construction group for unlawful conduct in its system of awarding contracts and R449 million on Telkom for abusing its dominance in the market.
An exhaustive list of successful investigations by the Competition Commission is unnecessary, but there is sufficient proof that it has an enormous workload. There was the investigation into price-fixing in the bread industry and the huge bounty it reaped (R320 million between the three food giants Pioneer, Tiger Brands and Foodcorp). There is the continuing investigation into the construction industry, with Stefanutti and 20 other companies having admitted to bid-rigging, and 22 more under scrutiny. And now that the commission has been given wider powers to conduct investigations, it plans to probe runaway price increases in the private healthcare industry.
One can only lament that this zealous approach to ensuring that there is honesty, integrity and fairness in the marketplace is limited to private enterprise. Surely, if a similar approach were adopted to the business of government, there would be a great leap forward in service delivery and dramatic improvements in the lives of millions of South Africans.
It may come as a surprise to readers to learn that the funds raised by the Competition Commission are disgorged into the state’s coffers, together with your tax receipts. So the penalties amount to punishment, rather than compensation to consumers. (In the case of the bread cartel, this has led to a fascinating challenge. For the first time in South African consumer history, consumers are mounting a class action to try to recover damages arising from the price-fixing, which affected poorer consumers in the Western Cape mainly, through sales of overpriced bread to spaza shops and informal traders.)
As a shareholder who believes in ethical standards, I am all for fair play and welcome the work of the commission. There can be no doubt that markets are more efficient without the iniquities of dishonesty. I would not like to benefit from corruption and collusion in the form of higher dividends and share prices, and I am sure that most shareholders would agree. This is particularly the case in a country with such a huge disparity between rich and poor.
From good practice in all sectors of the economy to a thorny debate in the arena of resources and mining that is a cause of great concern in different circles, and for different reasons.
At issue is how to make the best use of the country’s mineral wealth. There can be little doubt that all should benefit from these assets and that we should ensure that they add value within this country rather than simply being exported as raw materials.
There can also be little doubt that mining is best conducted by privately run and owned companies. These companies have the ability to raise the vast capital resources that are required to equip and run mines. This is particularly the case in South Africa today, where the mines are ageing and getting deeper and are becoming increasingly expensive to operate.
Private ownership also gives South Africans the opportunity to participate in the industry as shareholders. The mining industry contributes to the state by paying taxes, providing employment and infrastructure and providing the metals and minerals for beneficiation or export.
There is an important balance between the “mining rewards” that are distributed to shareholders (the providers of the vital capital, which is very much at risk); the state (which has enormous responsibilities to its citizens); the employees and their dependants; and all other stakeholders – which includes the environment. The fact that this balance has not yet been achieved is evident from the high level of industrial unrest we are experiencing and the declining financial “fortunes” of the mines – although this is clearly partly a function of commodity prices and currency fluctuations (refer to the graphs, link at the end of the article).
This issue is not unique to South Africa and is present to some extent in all mineral- and commodity-rich countries. For example, Australia imposed a “windfall tax” on the mining sector after a protracted and acrimonious debate some years ago.
Sadly, with all the problems facing our economy and the mining industry, we largely missed out on the last commodity cycle boom. It makes sense for all the stakeholders to get together to try to find a way of extracting the most value for all concerned, to ensure that we participate fully in the next cycle.
While I am on the subject of improving market efficiencies, the Johannesburg Stock Exchange (JSE) has finally announced the long-awaited change in its settlement system from T+5 to T+3. At present, purchases and sales settle on the trade day (T) plus five working days, so transactions on any day of this week are settled on the same day of the following week, unless a public holiday intervenes.
Under the old paper-based clearing-house settlement procedure, transactions in one week were settled the following Tuesday, although in reality a great many trades were settled much later. This system was creaking under the strain of the tremendous volume of trades, and the conversion to the paperless Strate system and T+5 introduced immediate and enormous efficiencies.
The move to T+3 is another major step in aligning the JSE with global best practice, and is a requirement of the Financial Services Board. The move should improve both the efficiency and credibility of our local markets, which have long lagged our foreign counterparts in terms of settlement cycle length. Markets in the United States have been on T+3 since 1998 and those in the United Kingdom and Europe since 2001. The JSE is the only significant market still on T+5.
The benefits of a shorter settlement cycle range from a reduction in the value of unsettled trades, to improved liquidity and numerous operational efficiencies. For investors, it means that the proceeds of their sales will be available two days earlier. However, the downside is that payments will also be due two days earlier, so the money will probably have to be in the account before a trade can be undertaken. That’s the price of progress …
The change to T+3 will probably be implemented towards the end of next year, and the ultimate goal is immediate settlement, but I doubt that that is on anyone’s radar yet.
* David Sylvester is a stockbroker with Investec Wealth and Investment.