And Don’t Even Mention the Russians…

Another look at South African economic & fiscal reality

By AAF Guest Contributor James Greener, Ph.D.

Minister Gigaba told us very little that we did not already know about the poor shape of the government’s finances. However, his unusual approach was actually to say as much and while he has been praised mightily for this, the market reaction has been severe. The prices of South African bonds and currency have plummeted. Those among us who over the past few years have been able to send a few sacks of cash to Dubai for safekeeping with our mates are probably feeling very relieved and smug. The frustrating but telling thing, however, is that all the hand-wringing has been directed at the failure of the income side of the budget to live up to expectation. Not very much at all has been said about the expenditure side of the equation. Given that there really are few untapped sources of significant tax revenue left it is obvious that the axe must be taken to the spending.

Some astonishing charts have been published highlighting just how much higher almost all public-sector salaries are, compared to private sector pay. Multiply this by the massive increase in the number of state employees and to the casual observer, not needing to influence voters, it seems obvious what needs to be done. Understandably any threat to their jobs will at the very least prompt massive strike action. And this should be met by the second leg of the program which is to make starting a business and hiring (and firing) staff so much simpler and easier. That is, create a way to soak up the talent and experience that will come onto (and is already unemployed in) the job market. But that’s two impossible things to believe on the day before the Currie Cup final.

The unwelcome consequences of deficits are debt and the cost thereof (aka interest rates). This is where the irritatingly influential ratings agencies pop up to scrounge a living, and so they are back in the news again. These analysts are no better than any others (see next story) yet because of where they work they assume unearned mantles of authority and infallibility. And because the minister offered some home truths they have (way too late) gone all angel of doom on us and are expected to downgrade South Africa yet again. The nation’s debt service cost is approaching panic station levels. It needs more than Gigaba to start talking specifics about what our government is going to do. To stop looting the public purse and dismiss all felons and thieves would be a good start and a way of sending a great message.

News of an interesting competition came to light recently. Four teams of trainee investment analysts drawn from different business schools were each asked to take a close look at a listed company and decide whether to recommend a buy or a sell. Each team approached the task in a different way using both published data and hands-on investigations of the firm’s products and markets. This resulted in the perfect balance of two buy and two sell recommendations. Anyone who thinks that this lack of consensus is a sign that the students clearly have a lot more to learn from their courses, should realise that this is the norm even after graduation. Anything published by a company (which, by the way, they do only because they have to) is very carefully massaged and managed. Obviously while shareholders and creditors need to be kept happy and informed there is a competing desire to keep competitors and the taxman in the dark. Consequently, it is quite understandable that two different teams can draw conflicting conclusions. It’s the old glass half empty versus glass half full story. Oh, the company they analysed? Distribution and Warehouse Network (Dawn).

Events are such that I’ll be wearing my Sharks shirt in Franschhoek in the Western Cape at the time of the Currie Cup final that will be played the Shark Tank here in Durban tomorrow. I have asked my hosts if we will be able to watch at a Sports Pub but they are dubious if I’ll be welcome. But I have every faith in the hospitality of all South Africans even when we hoist the Cup. (Apologies to the WP supporter who was offended last week at the suggestion that the Lions might win their semi) [Editors’ note: The article was originally published on October 27th, 2017]

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Circles of Corruption: how does Africa stack up against the OECD?

Inside & Outside the Circles of Corruption

By Peter O’Brien, Pr1merio chief Economics & Trade advisor.

Many widely quoted assessments of corruption rank African countries poorly. These ratings are based mainly on indicators related to the ways in which business contracts, especially those involving government funds, are concluded. The suggestion is that resources are wasted due to mechanisms which award deals to groups that, in open and transparent systems, would not have qualified to obtain the contracts. While there is undoubtedly a very real problem, it’s important for Africa’s standing in the business world to understand the actual situation.

For comparison’s sake…

During the present decade, the avalanche of detailed information concerning corruption in OECD countries, and in particular Western Europe and the USA, has been enormous. A central feature of the stories uncovered has been the failure of administrative systems in those places – and a strongly associated feature has been the failure to resolve the problems. Some examples, drawn not from the financial sector (where the cases are so numerous that to describe them is now superfluous) but from industrial activities and projects, will illustrate the point.

Since mid-2015, and growing by the week, the question of environmental pollution caused by faking the results of admissions tests on diesel driven vehicles has rocked the automotive industry. What began as an investigation into Volkswagen has extended to several other global manufacturers. The investigations so far have underlined several things. First, companies themselves have broken their own ethical codes in order to secure some competitive advantage. Second, there clearly exists an unhealthy, cosy relationship between the auto firms and the entities that are supposed to test and certify vehicles as compliant with regulations. Third, the power of organized corporate lobbies has been sufficient to delay remedial action, and in the case of the EU promises to postpone it indefinitely. Fourth, industry elaborated codes of conduct rarely work. Fifth, financial penalties alone are unlikely to alter the structures of corruption.

In Germany, the finalization of the construction of the new airport for Berlin in now several years overdue. The delays, and the additional costs (reported to be above €5 million per day), have been variously attributed to weak negotiation and formulation of the initial contracts, inadequate monitoring mechanisms, collusion among constructors and suppliers, and straight kick-backs to several officials involved. In the UK, the award of government contracts to a company, G4S, to provide security services for the 2012 London Olympics, was found by parliamentary investigation to be grossly negligent. But subsequent to those findings, the same company has been given several other contracts, some of which are currently under new investigations.

Where does Africa stand?

Kofi AnnanSo where does Africa really figure in an imperfect world where corruption and fraud have since time immemorial been part of transactions wherever they take place? The response should probably be along the following lines.

To begin with, African firms, in the sense of companies created and driven by African indigenous capital, till now have very limited capacity to organize the large scale, multi-country manipulations found in the OECD. Put differently, African entities, private and public, are almost certainly far more reactors than primary actors in the game. This generalization applies equally to involvement in the scandals rocking so many of the self -created and self- perpetuating bodies purporting to govern many types of world sport. In soccer and in athletics, some African individuals and entities have hopped on to the gravy train – but the drivers are elsewhere. In other notoriously corrupt fields, such as cycling, Formula One racing or tennis, Africa has yet to play a notable role.

Given that, to date, African enterprises and institutions have not played a significant part in the monitoring and assessment operations supposed to prevent and correct abuses, there is likewise no evidence of weight to put Africa in the hot seat with respect to implementation of anti-fraud and anti-corruption in international cases.

The mention above of individual major projects in Germany and the UK, a reference that could readily be extended to more or less all OECD countries, further implies that Africa is by no means different from other places regarding the presence of  seriously deficient methods of project award and project management. The relative extent of problems is hard to judge, partly because the intensity of investigation required to discover some of the situations in the OECD is so great. In other words, it may be that the cases found in Africa are simply easier to identify.

Not so bad after all…?

What does all this mean? Certainly it does not mean either that we should weaken the effort to reduce fraud and corruption, or fail to pursue the necessary improvements in public administration, public finance management, and legal mechanisms. But it does suggest that, fortunately, the degree and sophistication of fraudulent and corrupt behavior can be contained. It has yet to reach the levels found in the OECD, and indeed most African countries and institutions do not have the wherewithal to undertake corruption on the scale observed elsewhere. Timely action now might well avoid future disasters.

A final point is the actual impact of fraud and corruption on economic performance. In the absence of many detailed enquiries, it is not easy to state with confidence if the impact is worse in African countries, or in some of them, than it is elsewhere. What does seem to be clear is that, up to the present, the bad cases in Africa have received relatively strong publicity. Since in today’s world image is everything, it might be time for some of Africa’s institutions, national, regional and continental, to devote resources to showing what Africa is doing to improve its own systems, and ensure it does not reach the position which some other regions of the world are in.

 

The necessity of strong regional regulatory oversight on infrastructure projects in Africa

Africa-infrastructure

The necessity of strong regional regulatory oversight on infrastructure projects in Africa

RogerBy Roger Tafotie

Dr. Tafotie is a Pr1merio advisor with a legal & business focus on both African and European markets. A member of the Luxembourg Bar, he is also a lecturer in law at the University of Luxembourg. His focus areas include project finance/public private partnerships, banking & finance, and corporate law.

In his latest paper on essential infrastructure development on the African continent, Roger not only embarks on a mission to clarify the valuable role of public-private partnerships (“PPPs”) — he also reminds us that, beyond “well-drafted projects contracts,” there must also be an “effective and efficient African regional regulatory oversight system, with clear roles and lines of command, that is able to protect against ills such as self-dealings and anti-competitive alliances or monopolies,” including “the monitoring of the tendering process against corruption.”

Enhanced competition and an effective oversight system to weed out corruption in the bidding (and execution) process not only protects the local, national or regional governmental issuer of the infrastructure PPP. In order to keep all stakeholders, including global financing institutions or other private lenders, in a position of “acceptable risk,” a well-supervised competitive process is essential to tender selection and project execution.

You can find the full paper here, exclusively on AAF and on AAT.