Government’s renewed enthusiasm for green power needs to translate swiftly into action by finalising energy policy and seeking bids to build new plants, says Intellidex analyst Peter Attard Montalto. In today’s Business Day.

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Budget post mortem by Intellidex head of capital markets Peter Attard Montalto, in today’s Business Day column.

While it was generally credible, there is nothing left in the revenue cupboard to make big-impact changes

This column was first published in Business Day

There was a weird mania in SA in the week before the budget. A three-letter swear-acronym was being liberally bandied about: IMF!

It was the end of days. I was waiting for someone to scream “won’t someone think of the children!”.

Such “hyper-vigilance” (as Jonny Steinberg termed the general distrust in SA in these pages last week) is not a bad thing and forces an awareness of risks.

However, the IMF end-point diagnosis from many in the business community and some in the financial community misunderstands what is actually going on with fiscal policy.

It also meant expectations were set exceptionally low, and when that happens one is invariably surprised to the upside. Hence the bond and currency markets, after an initial spike weaker, ended budget day stronger.

The budget was broadly credible in its growth and revenue outlook. More than that, the loud thud of the Eskom elephant landing on the fiscus was muffled by challenging reductions in the public sector wage bill and non-core asset sales, and a smattering of line-item trimming.

All this reinforced several “norms” about the fiscal cycle.

First, the Treasury can partially overwhelm political blockages, with a toxic mix of competence, expertise and consistency. The sense from the post-budget parliamentary briefing as well as Tito Mboweni’s speech was that the adults were now in the room.

Second, the Treasury doesn’t waste a crisis. I doubt very much that the 30,000 proposed reduction in public sector jobs would have been possible without the Eskom crisis and shows an ability to see a crack of political space and cleave it open. As such, the underlying fiscal position (ex-Eskom) did show consolidation.

Third, SA has once again passed a hurdle of not having an “electoral-fiscal” cycle where expenditure blows out predictably pre-elections.

The Treasury also drew some some red lines that softened the general blow of the Eskom fiscal elephant.

A simple “no” has been delivered to other state-owned enterprises (SOEs) with a much tighter guarantee framework in future. We should be cautious given a contingency reserve of R13bn set aside for deployment at the medium-term budget policy statement in October, but such support will now come with tighter conditionality and the prospect of a chief reconfiguration officer.

The Treasury is taking control of the SOE mess. How politically sustainable within the ANC and cabinet this is remains to be seen.

No mention was made at all of the National Health Insurance (NHI) scheme. Given this was a major commitment in the state of the nation address, this is interesting and speaks to the fact that NHI is completely unworkable in its current form, likely unconstitutional as envisaged and uncosted. There are simply too many imponderables and never-ending timelines to “infect” the budget’s credibility with, even if NHI remains a huge long-term fiscal risk.

All this sounds sanguine, and indeed is the counterweight to the Eskom elephant and the breaking of the expenditure ceiling.

Different views are forming on breaking the expenditure ceiling. Personally, I think a rubicon has been crossed. True, it has been done “partially”, given that a portion of the Eskom bailout has been squeezed in under the old ceiling, and it has been broken mostly in the coming fiscal year. Yet the whole point is that it has survived free higher education, the Zuma years and is a formula, and it becomes easier to make excuses once it has been broken once. This shows why a more legislative-based rule, likely around debt levels, is required.

Serious political challenges lie ahead around the structure of the Eskom bailout, the cost and complexity of an unbundling (especially when you have red-lined retrenchments of 27,000 “excess” workers, according to the World Bank’s estimates), the tariff and prospect of a large hole remaining despite the bailout, and exactly what a new chief reconfiguration officer and external advisers are going to do when up against an internal culture and morale problem. As such the R150bn (in present value terms) bailout should be considered a minimum number.

Going forward, there is virtually no “easy” room to manoeuvre left to deal with the upside risks to the Eskom bailout, the downside risks to growth and revenue, NHI and all the other fiscal risks. The revenue cupboard has been bare for some time.

Now after the deployment of early retirement for public sector workers and some medium-run defence cuts there is nothing easy left in the expenditure cuts cupboard.

Only Narnia is left at the back of the cupboard to deal with future fiscal pressures. Yet we shouldn’t forget the points above about Treasury’s ability to use a crisis and its ability to overwhelm with expertise.

This means we remain in a situation where the budget broadly holds ground though at a sub-optimal place, meaning debt to GDP keeps grinding slowly higher. This is exactly what we saw with this budget.

When you combine this with decent real yield compensation in the long end of the bond curve, moderate inflation, exchange controls trapping money onshore and a poorly performing JSE,  this position is backstopped. Debt service costs are rising at about 0.1 percentage point of GDP per year and the economy is still growing (albeit too slowly), so the current iterative cycle of minimally sufficient budget restraint with slowly rising debt-to-GDP ratios is sustainable for a little longer.

The downside is there is no room to do anything “interesting” in the budget, such as tackle doing business constraints properly or focus on skills deficits and the transition challenges of the fourth industrial revolution. There also isn’t any room to absorb a global recession or a more disorderly outcome from a cut by Moody’s Investors Service or any deterioration in future public sector wage outcomes or political pressures on social grants.

The IMF, of course, is out there as some future scenario, but the unsustainable is always more sustainable than you think. For now, we stick in the “shock-recoil” ebb and flow of budget events — even with added elephants this time.

• Attard Montalto is head of Capital Markets Research at Intellidex.

Intellidex analyst Peter Attard Montalto gives global perspective on SA’s SOEs. Featured in SABC, watch the clip here .

We see Moody’s on course to cut the outlook in March but this is far from a certainty. More in Business Tech today.

Intellidex analyst Peter Attard Montalto said: “National Treasury managed to squeeze through public sector wage cuts and other trimmings … partly to fund the Eskom equity injections.” In Daily Maverick today.

Intellidex strategist Peter Attard Montalto says the budget office is understaffed and there is a thin layer of top staff who are holding the institution together. Read more in today’s Financial Mail.

The fourth, updated edition of the Financial Mail Guide to Tax-Free Savings supplement, produced by, was released on 31 January. It is designed to provide new and experienced investors with everything they need to know about tax-free savings accounts (TFSAs).

The guide serves as a useful reference for all investors wanting to start saving from scratch or to use TFSAs to boost their portfolios with tax-free returns. It includes costs of each TFSA, minimum investment amounts, the ideal investment period and the risk profiles of each. Service providers also describe how TFSAs have done in the past year and give their opinions on the future of this growing savings opportunity.

In case you missed it, you can now download your very own copy of the tax-free guide today and get the lowdown on tax-free savings: .

By: Heidi Dietzsch

A company is struggling with a certain problem and has approached you to find a solution. As a market researcher you are keen to face up to the challenge and start with the research process. You define a clear research objective and decide on the methodology, who the respondents will be and what information should be obtained. You design your sample and create a brilliant questionnaire.

You are ready to start on the data collection, that vital step in the research process, but you are faced with a major challenge. You need to find people who are willing to participate in your research. And not just anyone, these people need to fit very specific criteria. Also, you need a large number of willing participants because your client is expecting robust and authoritative data. Without respondents all the hard work you’ve done so far will be futile.

One way of overcoming this thorny conundrum is to offer incentives. The UK  Market Research Society describes an incentive as “any benefit offered to respondents to encourage participation in a project”.

Providing incentives, however, is not without controversy and raises some ethical issues. If certain standards are not followed correctly you risk being accused of bribery. Some researchers also wonder if incentivisation of respondents can skew data.[1]

Alderson & Morrow (2004) note that no persuasion or pressure of any kind may be put on respondents. It is therefore disconcerting that the offering of incentives might be perceived as coercive – or as exerting undue influence on potential respondents’ decisions about whether to take part in research. In particular, poor people might be vulnerable to possible coercion, especially if monetary incentives are involved. They need money and therefore their consent to take part in research might not be truly “freely given”.[2]

However, despite the above misgivings, the provision of incentives is a longstanding research practice. It is used to promote participation, as well as to encourage honest responses. Of course, it is also a way of thanking respondents for their time.

Contrary to what some researchers fear, many studies have found no support for the claim that data quality decreases when incentives are used. In fact, some studies show that data quality might even improve with incentives. For example, in a customer satisfaction study, a sample of respondents without incentives may be skewed towards dissatisfied customers who will be more willing to participate because they reckon they will be able to influence the research results negatively. For example, a person unhappy with her bank’s service could rate it overly negatively. By offering incentives, you may get a more balanced sample of customers, including those without an axe to grind.[3]

There are many ways in which respondents can be incentivised and it can be monetary or non-monetary. The value of the incentives will depend on the type of project, the data collection method (face-to-face, telephonic or online), the amount of time the respondent will spend taking part in the research, as well as the topic being researched. When research topics are very sensitive or personal in nature, the value of the incentive generally tends to be higher.

In terms of increasing response rates, studies have shown that cash is king and is most likely to pique the interest of potential respondents. Non-monetary incentives like thank you gifts are less successful in increasing response rates.[4]

Incentives have to fit the demographic and the interests of the respondents. For instance, if you are surveying millennials, the incentive should be something that they will find alluring. A pen with your company’s logo on will hardly entice millennials to take part in your study. An online gift voucher, however, will probably do the trick.

Offering incentives can sometimes have the opposite effect and this is something researchers need to be very careful of. When the incentive is too specific and will appeal only to certain people, you might alienate those who would’ve participated otherwise, even without incentives.

Studies that require the participation of high net worth individuals, professionals or people who are very unlikely to partake in research will need a different approach when it comes to incentives. Traditional rewards, especially monetary ones, will not work for this group. A good idea in these cases is to contribute to people’s charity of choice. Such a gesture will also appeal to people’s altruistic side.

Research agencies often need to conduct international studies and rewarding global respondents can be a logistical nightmare. Fortunately, the rise of digital payments such as PayPal, e-gift cards and virtual Visa and MasterCard make it possible to send incentives globally with speed and reliability. Digital rewards can be delivered instantly and can be easily tracked.[5]

Sometimes, however, no physical reward is necessary. The incentive that might hold the most value for respondents is the perception of value itself. When respondents believe that their input is important and will be used to make significant decisions, they are more likely to participate in research. Also, people are more inclined to provide honest answers when they feel that these answers can influence positive change.[6]

The decisions on whether or not to offer incentives and what the incentives will be should not be taken lightly. The correct use of incentives can contribute greatly to the success of your research project. However, it should be part of a well-executed process. If not – say for instance certain respondents don’t receive the promised incentive, or not at the agreed upon time – it can cause serious damage to a company’s reputation and will certainly deter any future respondents.







Markets will be significantly disappointed if only the form or policy position on an Eskom plan is announced in the Budget, says Peter Attard Montalto, head of capital markets research at Intellidex. Featured in today’s Mail & Guardian.

Intellidex analyst Peter Attard Montalto notes: “There are no details of a plan for Eskom to be able to judge as credible and there won’t be any before or at the Budget.” More in today’s Daily Maverick.

At a “guesstimate”, SA’s gross domestic product has likely lost around R1bn a load-shedding stage each day, says Intellidex analyst Peter Attard Montalto. In Fin 24


Cosatu’s claim that IPPs are ‘draining’ Eskom is wrong

This column was first published in Business Day

Is it true that independent power producers (IPPs) are “draining and collapsing” Eskom as Cosatu claimed last week during its strike over a proposed restructuring of Eskom?

Let us consider the facts. Eskom buys the IPPs’ electricity at prices that are agreed in the rounds of auctions that award IPP projects. So if you know nothing more, it seems as if Eskom is having to pay IPPs at prices that are out of its control out of its own resources.

But, the reality is far different. First, IPPs are treated separately when Eskom’s tariff applications are considered by the National Energy Regulator of SA (Nersa). All payments to IPPs get a full pass-through cost into the tariff. So if there were no IPPs, Eskom simply wouldn’t get that element of the tariff. For Eskom’s cash flows, IPPs are therefore entirely neutral — the cost to the utility is perfectly offset by the tariff.

There is one small cost to Eskom, however. This is the infrastructure cost Eskom bears to connect IPPs to its grid. IPPs pay to get the energy to the connection point, but Eskom then hooks them up. This cost is a good reason we should have an independent grid company, so connection costs can be managed equally across Eskom and the IPPs. Whether an IPP or an Eskom plant is being connected shouldn’t make a difference.

Second, the marginal cost of IPP production is far below Eskom’s. The cost of new Eskom builds — Medupi and Kusile —  has been a matter of contention. In 2016 the costs of Medupi and Kusile produced electricity were estimated by the Council for Scientific Industrial Research (CSIR) to be R1.05/kWh and R1.16/kWh respectively. But that was before further delays and the revelations, made abundantly clear last week, of serious design and production problems at both stations. When the ash settles, the cost of electricity will be significantly more, perhaps two to three times the 2016 estimates.

In comparison, in the fourth round of the IPP auctions concluded in April 2015, bidders averaged R0.92/kWh. So even an optimistic reading of Medupi and Kusile’s electricity cost is higher than the more recent IPP prices. This fact is often muddied in the debate by reference to the earlier IPP round prices, particularly round 1. This price averaged R2.79/kWh.

That was high because the renewable energy programme was new and the risks were poorly understood,  also because the cost of solar panels and wind turbines was much higher. That price should be seen as an investment that kicked off a pricing race that reduced renewable costs below that of Eskom’s power. Consider also that there are no cost risks — prices are fixed (subject to inflation adjustments) for a full 20 years. So delays or design failures don’t mean any extra costs to Eskom.

Of course, the prices ignore the indirect environmental costs of Eskom’s coal-based production. According to Eskom’s own estimates in a parliamentary submission in 2018, emissions from 13 of its coal-powered stations cause 333 premature deaths per year, with a health cost of R17.6bn.

Independent experts have put the number of deaths at more than 2,200 per year. If Eskom were to get its existing fleet to comply with current minimum emission standards, it would have to spend R187bn. The Centre for Environmental Rights has estimated that Eskom exceeded emissions standards 3,200 times over a 21-month period, each of which is a criminal offence. The IPPs have zero emissions.

But one doesn’t even need to factor in these indirect costs to see that IPPs benefit Eskom’s financial position. With the marginal cost of IPP production below the marginal cost of Eskom’s own production (not even considering the astronomical cost of running its diesel-burning peaking plants), every additional kWh that Eskom buys from IPPs is more profitable to sell than its own production.

So Cosatu’s claim that IPP’s are “draining” Eskom is doubly wrong — not only are the costs of IPPs explicitly covered by the tariff, but Eskom earns bigger margins on new IPP generation than its own new fleet. IPPs are a solution to Eskom’s financial distress, not a cause of it.

And the future looks even more profitable. Thanks to the auctions system that SA pioneered, more recent auctions held elsewhere in the world have shown prices can fall further.

In December 2017, Mexico ran an auction that was won at 2.1 US cents per kWh, currently equivalent to 29.6c/kWh. That’s at least a quarter, and probably far less, of the cost of Medupi and Kusile. When SA runs its next IPP auctions, the pressure will be on for projects to come close to that level of pricing.

The IPP programme has 112 approved projects, of which 62 have been connected to the grid so far. Those are producing electricity equivalent to 66% of Medupi’s design capacity.

The National Union of Metalworkers of SA’s head Irvin Jim says Eskom must be allowed to produce renewable energy. Well, it can. When the next IPP auction rounds happen, let an unbundled generation arm of Eskom bid for the projects.

If it is able to bid at competitive prices, there is no reason why Eskom can’t be a renewables producer.

The market is over-estimating the room for optimism about Tito Mboweni’s upcoming Budget, reckons analyst Peter Attard Montalto, head of capital markets research at Intellidex. In today’s Fin 24.

Intellidex analyst Peter Attard Montalto says that the ‘hole’ in Eskom’s books is between R250bn and R300bn (without counting the unbundling costs). Read the full article in Business Tech.

Intellidex analyst Peter Attard Montalto says plan to separate Eskom into three entities but keep them under one holding company means the incentive issues and monopoly mindset will remain. Featured in CNBC Africa .

South Africa faces five scenarios post-election, ranging from extremely good to extremely bad, depending on the results, says Intellidex analyst Peter Attard Montalto in Business Tech.

Investors have learnt that intent is insufficient in the face of severe binding constraints on growth

This column was first published in Business Day

When exactly do you start pencilling “intention” into a GDP forecast and into asset prices?

This is a question that will plague analysts and modellers as well as investors in the coming year after last week’s state of the nation address (Sona).

After the ANC’s Nasrec conference and the 2018 Sona, GDP forecasts were upgraded by about a percentage point on the back of expectations of a different way of doing things and Ramaphoria leading to improved investment and growth. That turned out to be very much premature.

Investors learnt that intent and even actual, real strong positive sentiment are insufficient in the face of severe binding constraints on growth, as well as the fact that such changes can take considerable time.

GDP forecasts for 2018 were therefore revised back down during the year despite so many summits and announcements. As such scepticism on growth and the ability to turn it has set in and was evident in business leaders I met on a recent two weeks in SA.

Some of this is justified given that the complex and heavily interwoven nature of the binding constraints on growth mean many things need to be put right first.

However, we need to be constantly on guard to not make the same mistake in the opposite direction and keep growth forecasts too low for too long.

Beyond the specific narratives of the 2019 Sona, it is clear the Ramaphosa government now has an ability to crowd-source various, specific ideas into a speech and then into a programme for government.

The December and January colloquia as well as the Public Private Growth Initiative (PPGI) seem to have had a strong impact in this regard.

Beyond the specific narratives of the 2019 Sona, it is clear that  Ramaphosa  now has an ability to crowd-source for government programmes.

Indeed, one of the most radical and positive set of proposals in the address related to early childhood development and child literacy was lifted from the contributions of Nic Spaull from Stellenbosch University during the colloquia process.

Investors and forecasts are left then with a hard choice after Sona 2019. Do you give benefit of the doubt on what was announced? If you do, how are you going to shift your forecast? What elements of the address equate to how much on the GDP forecast for 2019, 2020 or 2021?

Does a reference to increasing the focus on export-led growth lead to a percentage point or half a percentage point on growth in the coming year?

These are important questions for the Reserve Bank and Treasury too, both setting policy off these forecasts in the coming months.

There are simply too many imponderables, especially before the election. For me the strong commitments and intent of the Sona on growth policy adds moderate upside risks to growth in the medium run, but the chance of realising those positives is still uncertain. I think many foreign direct investments and portfolio investors come to the same conclusion.

As Stuart Theobald laid out here in November, companies at a micro level need higher returns and lower risk in order to get investment growth at a macro level moving.

The intent shown in the Sona has the potential to start to reduce future risk for investors, at the margin, but needs to be followed through with action and then momentum to bust through scepticism and properly adjust investor perceptions of risk reward.

This is going to be hard. Recent announcements by Total of the discovery of hydrocarbon reserves off Mosel Bay are risky if they distract from the hard work needed to shift the underlying doing-business environment and so improve the risk reward for domestic and foreign investors.

SA needs to be cautious of not falling into a Dutch disease trap,  and in any case such hydrocarbon support for the economy is itself uncertain, risky and likely realised only in the longer term.

In the interim, the Sona identified a new way of thinking, in one specific announcement. While the speech was full of “more of the same” in terms of sectoral focus and directed central government control on economic policy, the targeting of SA to move from 82 to within 50 on the World Bank Ease of Doing Business ranking is, for me, highly significant.

The reason it is so significant is that the Doing Business rankings, for all their faults and simplifications, are one headline number that is comparable across countries. It is easy to track and independently, externally produced. To jump so many places in three years is a huge ask, though certainly not impossible.

More importantly, the make-up of the rankings is specific and detailed, targeting the actual factors that impede or facilitate business in start-up and expansion.

The rankings look at 10 sub-indices: starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting minority investors; paying taxes; trading across borders; enforcing contracts; and resolving insolvency.

I find the fact these sub-indices are generally facilitators of the creation and growth of small, medium and micro-sized enterprises, as well as proxies for the ease of the formalisation of informal-sector enterprises, all the more interesting.

The World Bank provides specific and detailed feedback on the rankings every year, which is a template for government, and others such as the Organisation for Economic Co-operation and Development are also doing work on blockages in the economy at a micro level. The Sona promise to provide a regular feedback mechanism to cabinet means there will now be no excuse for inaction.

Just as the Eskom-induced “panic” created a mindset change to necessary fundamental reform, so targeting the Doing Business rankings can create a focused mindset for change and emergent growth within cabinet and the government by getting the foundational basics right.

As implementation starts, scepticism will fall away and then growth forecasts can rise in the medium run.

• Montalto is head of capital markets research at Intellidex.


Intellidex analyst Peter Attard Montalto says moving South Africa to 50th place from 82nd in the World Bank’s annual Doing Business Report “is a huge ask”. Featured in Daily Maverick.