Energy experts have publicly laid bare the lack of wider energy policy coherence yet no action has been taken

This column was first published in Business Day

The load-shedding shock has apparently not been big enough to cause any action.

The economy hasn’t fallen off a cliff in the first quarter and we have seen inherent robustness of the private sector. There appears to have been limited impact on party polling.

So, no problem?

The problem is this robustness breeds complacency (paralleling complacency on the unemployment and inequality crises) among policymakers. Yet it is worse than that. Energy experts have fully laid out in public in the past month the lack of wider energy policy coherence yet no action has been taken.

Analysts, investors and many parts of the media mistakenly think we are dealing with a simple government policy-formation, deployment and implementation machine.

Instead of productive panic, complacency is mixed with internal political factional battles, a blurring of party and state, rent-extraction elements clinging on, ideological lead weights, egos and personality clashes, micro-fiddling, a deep fatigue and a strange “Eskom cognitive dissonance syndrome”. This is a toxic mix in which policy and optimal strategies are far down the pecking order.

This goes beyond the need for polite discussions with alliance partners. It is important to unpack this mix because the lazy consensus is to assume that after the elections the deep threat of the financial and operational challenges at Eskom will suddenly unblock and problems at the utility will magically be solved.

There are some simple and obvious ways to fix the problems.

An enormous amount of political capital should be deployed through effective leadership to unblock channels, riding over ideological bonds and breaking with cognitive dissonance.

Eskom should be moved from reporting to the department of public enterprise to reporting directly to the Treasury. The idea of having a chief restructuring officer is a halfway house to this endpoint.

The National Economic Development and Labour Council (Nedlac) process for consultation over integrated resource planning (IRP) should be cancelled and a new least-cost version audited by the Council for Scientific and Industrial Research (CSIR) should be approved by the cabinet with emergency procurement of unlimited renewables (taking as much as possible at a set price of say 60c/kWh) within two months.

The key thing after the elections is leadership on Eskom, and energy policy that is credible and comprehensive, derisking of Eskom with international development finance institution funding of the just jobs transition, and a credible least-cost IRP that reduces electricity bills while stimulating growth.

It seems unlikely it will happen.

The financial need to achieve going concern will be so pressing in the six weeks after the election that everything else will be thrown out of the window. Eskom must have a new bailout 2.0 by the time it publishes its 2018-19 results towards end-June to achieve going concern, which due to the National Energy Regulator of SA (Nersa) tariff award it will not have at this rate. Add to that the recent evidence of liquidity problems at end-March.

Although going concern is not essential for dedicated emerging markets investors who understand the legal blockages in accelerating debt, for other creditors and companies and the public using electricity it is a dramatic event to have auditors declare that the entity is unlikely to be functioning in a year. The sentiment shock would be seismic.

The ideological fissures are furthermore too deep when mixed with personality conflicts. There is a core belief in much of policy-making land that as Eskom provided cheap electricity for so long, it can be part of a command-and-control developmental state solution that can solve all social and other problems including transformation and as such, while it may need to be unbundled, it is fundamentally okay. This is what “Eskom cognitive dissonance syndrome” is — trying to change it while not changing anything at all.

Rent extraction

Renewables are therefore still viewed suspiciously, something Eskom should really be doing, a nice-to-have around the outsides of the energy system but not at its core.

The same circular discussions about bailout 2.0 will still be had after the election, especially if the faces are unchanged, with the ANC’s national executive committee acting as a check on the whole process and rent-extraction elements circling.

What we are likely to end up with is a bailout with minimal conditionality, given that any credible conditionality will be politically impossible.

Yet there is a key need for conditionality on a deleveraged Eskom, more so given it could issue to investors in enormous size, unguaranteed at tight spreads immediately after such deleveraging. A low-leverage Eskom can be dangerous. Why the need for cost restraint, for not paying more for politically connected coal contracting? Why not offer large wage increases, or become the centre of building renewables?

This all becomes more affordable with slashed debt service costs — and is why conditionality is needed to deal with overstaffing, mothballing expensive capacity, cost control and other oversight restrictions. But more clever conditionality would also include ensuring wider energy policy coherence.

The urgency of the Eskom financial crisis can arrest the fatigue of policy makers. The fatigue of the operational issues however may be more challenging or even impossible to shift, and is why a much wider energy policy shift is urgently needed that overcomes the complacency and cognitive dissonance.

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

More productive panic is needed on Eskom, says Intellidex analyst Peter Attard Montalto. Featured in his Business Day column

Intellidex financial analyst Phibion Makuwerere speaks to Power FM’s Ron Derby on Pick n Pay’s best performance in a decade. Tune in here 

Intellidex is a growing research and consulting house specialising in African financial markets for clients across Africa, Europe and the USA. We have offices in Johannesburg, London and Boston. We provide investment research, financial services market analysis, valuations, and strategy. Most of our work is commissioned by major financial services companies and investors, and sometimes our research leads to highly influential publications.

We are looking for a client relationship manager to take the lead in developing relationships with existing and new clients, to be based in Johannesburg. The ideal candidate will bring together a background in sales, financial services and client facing engagements. He or she must be comfortable presenting and engaging with senior executives in South African companies, NGOs, government agencies and other entities. At a minimum, applicants must have at least a bachelor’s degree and five years’ experience in a sales environment related to financial services.

Performance will be judged by new clients and revenue you attract to the business, tracking and monitoring customer relationship management systems, client retention, workflow management.

We offer a small company environment in which you will have considerable latitude to shape your role. Remuneration will be a mixture of basic, commission, and performance-based pay.

Our standards are high. You will be working with MBAs, CFA charterholders and PhDs on our team to ensure that Intellidex delivers high levels of client satisfaction and responds dynamically to new business opportunities.

If you are interested in the position, please send a covering letter and CV to before 15 May 2019.

By Graunt Kruger

Last week FNB announced that it was transforming from being just a bank into a “diversified financial services company”. This did not come as surprise. It follows Discovery’s move into banking. Indeed, the health insurer had taken its first step towards banking through a partnership with FNB for the Discovery credit card. When Discovery launched its bank, it bought out FNB from the card joint venture. In return, FNB’s announcement positions it to go after more of Discovery’s turf, particularly in asset management and insurance.

These strategic moves are more than just competitive reactions, they also signal a major shift in how banks do business and, even more fundamentally perhaps, how they see their role in society. In particular, banks are having to demonstrate that they add value to their customers’ lives by showing how they can make their clients financially better off, a concept called financial wellness. This social dimension to the banks’ new strategies seems to align them with a new fad in investment called impact investment. My question is whether one can link socially-orientated banks and impact investment funds.

The financial wellness move has evolved rapidly worldwide. In 2015 I completed my PhD on financial inclusion. At the time it felt like a leap of faith to challenge the financial services sector (and banks in particular) to reconsider their approach to financial inclusion. In the study I marshalled a large variety of evidence from banks’ inclusive strategies, the Financial Sector Charter’s requirements to extend financial services to the previously excluded, a vast amount of academic literature and recorded data from local economies in townships. The evidence showed that financial inclusion would likely lead to an expanded distribution infrastructure through the application of technology and redesigned products. Yet proof that financial inclusion did not always result in positive outcomes for all new customers was already mounting. This means that some customers are effectively made worse off after they are “financially included”. The now well-worn figure that commentators cite as proof of adverse inclusion is the 50% of credit active South Africans who have an impaired credit record, suggesting that their credit products have left them worse off than when they were excluded from the financial system.

I now think it is better to aim for financial wellness rather than financial inclusion. I have previously argued (with co-author Grant Locke) that financial wellness has four pillars: positive cash flow, positive net worth, appropriate risk mitigation through insurance and improved creditworthiness. Credit should be seen less as a way to fund consumption and smooth income and more of a way to help families build assets.

The future of the financial wellness trend is being revealed in the US. An early mover, Key Bank, co-opted financial wellness as its overt value proposition to customers with the brand slogan, “financial wellness starts here”. Despite being a small regional bank in US terms, with $137.7bn in assets and $6.3bn in annual revenue (2017) it is only slightly smaller than the Standard Bank Group.

But America’s mammoth banks JP Morgan Chase, Citibank and Wells Fargo are also catching on to the trend. All three have also started their own journeys to customer financial wellness. JPMorgan Chase created Finn (an all-mobile bank that offers automated savings) and bought WePay (a payments startup that powers payments for crowdfunding platforms). Goldman Sachs launched Marcus (a bank for millennials) and bought Clarity Money (a financial wellness app).  Wells Fargo has embedded financial planning and monitoring capability into their banking app. These banks are largely reacting to millennials – a growing slice of their customer base – who don’t buy that banks are working in their best interest. Millennials are heavily indebted with student loans (now the second-largest source of consumer debt after home loans in the US). These banks have recognised that their younger customers must know that financial wellness is at the core of the bank’s offerings.

Financial wellness is seen as a strategic market opportunity by many more US startups. Last year, a report by consultancy Oliver Wyman examined the business models of no fewer than 350 fintech startups in the US working on financial wellness.

The trend is clear in Africa too. In 2018, African fintech startups raised $284.6m from a mix of impact and traditional investors. Most notable are Lidya – a service that helps small businesses in Nigeria access finance through new credit scoring models that raised just under $7m – and South Africa’s Yoco, which has attracted upwards of $16m in funding from overseas investors. Lidya helps small business owners access credit and hence grow their businesses. Yoco works on the positive cash flow pillar of financial wellness by helping small business owners accept payments through low-cost hardware attached to mobile phones. Impact investors in these entities include Omidyar Network, Alitheia Capital, Bamboo Capital Partners, Tekton Ventures, Accion Venture Lab, Newid Capital, Dutch bank FMO and Quona Capital.

Commercial banks and fintech startups are working towards the financial wellness of customers. The question I now ponder is whether investment into these efforts amounts to a form of impact investing? One prominent definition of impact investing is “the intention to generate social and environmental impact alongside a financial return”. As my colleagues have argued, the measurement of social returns in impact investing is critical, but infinitely harder than measuring financial returns. Impact measurement frameworks offer a variety of metrics for measuring social returns, which are often numerous and vastly complex.

I propose a simple way to measure the social returns of impact investment in financial services. Recall the four dimensions of financial wellness: positive cash flow, positive net worth, appropriate risk management and improved creditworthiness. Suppose these were the criteria for an impact investment portfolio in financial services. Discovery Bank, with its new behavior-driven dynamic credit repricing strategies, might fit squarely into this portfolio. So would FNB’s new “diversified financial services” strategy that intends to enable customers to manage their personal finances better through financial planning tools and analysis of their spending behaviour. Both of these banks are putting the tools together to help customers build positive net worth and manage their risks. From what we can tell now, neither would completely deliver the full outcome of financial wellness but could nevertheless be worthy members of what we could call a “financial wellness impact investment fund”.

The portfolio could also include startups such as Wala from Cape Town, which started as a blockchain-based payments service and then added the ability to find work, offering global jobs through its app with earnings in Dala, the digital money that powers Wala.

Wala would qualify because it is working actively to improve the first lever: positive cash flow. Rather than wait for its customers to earn money to then be able to transact on the platform, Wala is helping them to find work, so helping customers to generate income. A second addition to this portfolio would be Jump Credit, a US-based startup that helps consumers improve their credit scores. This is the fourth pillar of financial wellness. For the net worth pillar there is a range of options such as international firms Betterment, Qapital, Robin Hood and Acorns, which are all examples of the wealth management strategy known as robo-advisory. All these startups work to build financial assets for customers. Lemonade and Ladder, two insurance startups, stand out as important new ways to buy insurance and sit in the risk mitigation dimension of financial wellness.

Impact investing in financial services can quite comfortably be seen as bringing about financial wellness as a social return. There may be a myriad additional social metrics that could be added to more fully measure the social returns of investments in financial services. However, without the four dimensions of financial wellness at the core of the social metrics, we would completely miss the social value that banks (and other financial services companies) can and do deliver today for an increasing number of their customers.

Social value aside, impact investment for financially focused investors must deliver financial returns. What remains to be proven is that the financial wellness strategies can deliver sustainable businesses and investment returns strong enough to satisfy investors.

Intellidex analyst Peter Attard Montalto raises concerns that information around the Eskom emergency financial allocation is “buried in Parliament…and not communicated openly with Eskom creditors”. Featured in Daily Maverick

Maria Ramos’ track record makes her stand out to fill the position as Eskom Chief Reorganisation Officer, says Intellidex chairman Stuart Theobald. Listen to more on The Money Show.

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See the 2018 report here.

By Heidi Dietzsch

In any election year the media are flooded by election poll findings. These polls certainly make for good news stories, but you have to wonder how accurate they are and how much faith we should put in political polls that attempt to predict the outcome of an election.

Peter Attard Montalto, Intellidex’s head of capital markets research, believes that good polls, with a proper understanding of their construction and limitations, are a useful tool for everyone, from voters to analysts and investors. “The outright rejection of polls as somehow invalid given they are not the actual vote, is bizarre and anti-scientism,” says Attard Montalto.

Political polling is a type of public opinion polling and, when done right, is an accurate social science with strict rules regarding sample size, random selection of respondents and margins of error. However, even the best public opinion poll is only a snapshot of public views at the particular moment in time, not an eternal truth. Voter opinions shift dramatically from week to week, even day to day, as political parties battle it out on the campaign field.[1]

Although election polls attract a great deal of attention for their ability to predict the outcome of elections, their most important function is to help journalists and citizens understand the meaning of the campaign and the election. Polls help to explain, among other things, what issues are important, how candidates’ qualities may affect voters’ decisions and how much support there is for particular policy changes.[2]

Attard Montalto reckons that there are two problems with South African election polls. First, polls are often poorly constructed, without appropriate weightings and sample sizes and with many methodological errors. Indeed, some are not even opinion polls in the proper sense, especially those derived from social media or ones that fail to understand the difference between registered and non-registered respondents. The second problem is that the South African media fail to report polls properly, seeing them as forecasts rather than snapshots in time, and not clearly explaining methodological issues.

So, just weeks before the election, what are the South African polls telling us about how South African are feeling?

The Association for Free Research and International Cooperation (Afric) conducted two polls of more than 3,500 South Africans in October 2018 and February 2019. Almost 60% of respondents painted the ANC in a favourable light, citing new initiatives to support businesses, anti-corruption policies, new taxes to improve the economy and other policies targeting social ills such as crime as reasons for their positive attitude towards the ruling party. Fifty-eight percent said they would vote for the ANC, 17% for the EFF and 10% for the DA.[3]

In a separate poll by global market research firm Ipsos, 61% of respondents said they would vote for the ANC. The governing party is followed distantly by the DA (14%), EFF (9%) and IFP (2%). Ipsos conducted face-to-face interviews with 3,571 adults between 23 October and 14 December last year. [4]

The latest poll by the Institute for Race Relations (IRR) suggests that in the national picture, the ANC is sitting on 55%, the DA on 22% and the EFF on 12%. When considering the provincial picture, the results are quite startling. In Gauteng the ANC is well below the 50% mark, hovering on 42%. The DA is on 32% and the EFF is on 18%. The key aspect here may not be so much that the ANC is below 50%, but so far below 50%. It seems quite possible, based on the IRR’s poll, that the ANC could lose the province, which could have complex and important ramifications for the party.

In the Western Cape, the DA would be in power with 50%, while the ANC is on 34%. The EFF is almost nowhere in this province; it is behind the ACDP, UDM and Patricia de Lille’s GOOD Movement.[5]

Attard Montalto believes that Ipsos polls just before an election are generally quite accurate given their large sample sizes and good fieldwork, especially in rural areas and townships. However, their polls have shown methodological problems in earlier campaigns, and last-minute polling is not particularly useful for financial markets specifically. He says the IRR polls are more interesting since they focus on trends and shifts that occur during campaigns. But, he warns, the IRR polls do not have a long enough history to be meaningfully assessed over time.

Despite good intentions and sound methodology, polls often fail dismally to accurately predict outcomes. For instance, what went wrong for pollsters during the 2016 US election and the British Brexit referendum?

One factor could be the gap between rational behaviour and emotional behaviour. How people feel in the privacy of a voting booth might differ from how they will react to a polling question when they feel that a justifiable, sensible and politically correct answer is required.

There is also the phenomenon of the “shy voter”. Through social media, people have learnt that serious repercussions can follow when they express opinions contrary to the mainstream discourse. Therefore, voters may tell pollsters that they are undecided or will vote for the socially acceptable option, while planning to vote for a more controversial candidate on election day.

Political polls are part and parcel of election times and these periods will probably be significantly less exciting without them. Polls that don’t apply appropriate methodology should be viewed sceptically, while those that do can certainly be useful.

What’s important, though, is that there is no such thing as a political crystal ball and pollsters are not clairvoyants. There are many variables and every election presents fresh challenges with unique parameters and issues.

One thing is clear – when the pollsters do get it right, they are lauded almost as much as the winning candidate or party. But when they are wrong, their critics have a field day.






A new populist bill places the power to intervene in commercial transactions in a minister’s hands

This column was first published in Business Day

South Africans’ over-indebtedness has long been a political risk for the financial system. Almost 10-million have impaired credit records and millions more struggle to meet repayments. That is a sizable voting constituency.

Cold political logic dictates that politicians can make short-term gains by appeasing that constituency, even at the risk of dire long-term consequences for the financial industry. And that is what is happening.

It started in the run-up to the 2014 national election. Then, it was the credit information amnesty (done via regulations to the National Credit Act) that was rushed through parliament. The amnesty was a watered-down version of what had initially been proposed. The financial sector put up a spirited battle against more dangerous ideas including a debt amnesty, but ended up with regulations compelling credit bureaus to delete certain kinds of adverse credit information, making it easier for many to obtain new credit.

Fast forward to 2019 and the stakes have ratcheted up. The National Credit Amendment Bill, colloquially called the debt forgiveness bill, is currently sitting on the president’s desk awaiting his signature to become law. It gives the National Credit Regulator the power to write off debts of up to R50,000 after suspending the debts for up to two years for those earning less that R7,500 per month. It also gives the minister of trade and industry the power to declare debts “extinguished” as well as to impose caps on interest or fees. This is a clear political device that can be used arbitrarily to write off the debts of whomever takes the minister’s fancy.

This is very likely unconstitutional. Such powers enable the minister to confiscate property, given that any loan is an asset in the hands of a lender. It would therefore fail constitutional muster on at least two grounds: the sheer arbitrariness of it fails the many requirements for due process and restrictions on ministerial discretion, but also the right not to have one’s property arbitrarily removed.

The amendment bill accelerates a trend of political populism in which politicians grant themselves powers to directly intervene in agreements between commercial parties. It follows recent changes to competition legislation that grants the minister of economic development extensive powers to intervene in mergers and acquisitions. One has to remember that such discretion in the hands of ministers must be able to accommodate any future individual in the role. Our recent history provides plenty of examples of how ministerial power can be used in ways at odds with the public interest. Ministerial discretion comes back to bite.

When it comes to populist political moves on debt, the evidence is that they backfire. India provides a clear example. In 2008, shortly before a national election, the government passed legislation writing off about $16bn-$17bn of loans to farmers. While this move obviously reduced indebtedness, subsequent studies have shown that lenders thereafter red-lined all individuals eligible for debt relief, refusing to lend to them.

This was even though India’s scheme saw the government recapitalise affected banks, so the loans were effectively paid off by the government. However, lenders started to anticipate future interference in the lending market, avoiding any loans vulnerable to future write-offs. And they were right to do so. Subsequent Indian governments have followed with further debt relief programmes, usually timed with elections. With Prime Minister Narendra Modi losing support in rural areas, he is now creating a debt write-off scheme that some have estimated would extinguish about $56.5bn of farmers’ debts.

The Indian example shows that once you have admitted in principle that politicians can intervene in credit agreements and direct lenders to write off loans, the genie will never go back into the bottle. It becomes a tool in the political arsenal forever onwards to use in populist flourishes in the run-up to elections.

The industry, of course, rationally responds. It anticipates what moves politicians will make and withdraws lending. The current bill will cost the banking industry but not devastate it. There are 9-million people with loans of under R50,000, some of whom could be considered over-indebted. However, “over-indebted” is not defined in the legislation and it is hard to anticipate who might qualify. Lenders are likely to err on the side of caution and reduce lending to the segment substantially. They will also probably avoid the next tier — up to, say, R100,000 — anticipating that at some time in future the threshold will shift, probably in time for the next general election. Millions of those consumers will be ones who would genuinely benefit from access to funding, though many will also borrow in the belief that their loans could be written off by political fiat.

Certainly, SA does have a consumer debt problem. But what we need are interventions that drive lenders into providing healthy forms of debt, such as asset-based finance that allow poor consumers to build assets, rather than consumer debt. We should also work to deal with inefficiencies in the current debt resolution process, reducing the cost of debt counselling and sequestration. Some lending practices should be banned outright.

But equipping ministers with discretion that can be wielded arbitrarily will simply damage the ability of the lending industry to meet consumer needs. It is a genie that should be kept in the bottle.

• Theobald is chair of Intellidex.

By Stuart Theobald

Why invest only for financial gain, when your investment can also have positive social consequences? The idea that our investments can do good in the world, rather than just serve our narrow financial objectives, has excited a new generation of savers. But is impact investing just a fad, or a deeper shift in the mechanics of the investment market? I think it can be the latter, but we must avoid wishful thinking and confront some of the challenges to effective impact investing.

What is impact investing?

There are various definitions. A useful one comes from the Global Impact Investing Network: “The intention to generate social and environmental impact alongside a financial return”. This definition excludes some related ideas such as socially responsible investing (SRI). SRI works by filtering portfolios, either negatively to exclude companies deemed to be harming a particular social objective (for instance, coal mining), or positively by directing investment into companies deemed to have a positive impact on particular social objectives (for instance, renewable energy). Impact investing, in contrast, is focused on investments that are designed to have a particular impact, for example, shares in a company that has set employment creation as a specific goal, or one focused on technology to remove carbon dioxide from the atmosphere. One exciting example of impact investment is the social impact bond. A variety of this has been pioneered in the Western Cape to target early childhood development outcomes, in which NGOs are directed to achieve targets and investors receive a payoff if they succeed. But, as I will discuss, there are many other types of instruments that qualify.

Types of impact investors

All investors have unique objectives. That’s true in impact investing too. The first way to split impact investors is in the balance between financial gain and social impact. The interests of investors can be placed on a continuum – from those who are “financial first” to those who are “impact first”. Different investors sit at different ends of this continuum. At one extreme, investors argue that impact investing is a way to earn superior returns to market returns. They argue that investing which advances the interests of society is more likely to earn high and sustainable profits. I don’t think this is a coherent proposition – conceptually, any company can increase social returns further by directing profits into social outcomes. It is not true that greater social outcomes will lead to greater profitability, at least in general. At another extreme, investors are willing to lose their capital entirely providing certain social objectives are achieved. We can analyse the trade-offs between these two objectives. Social outcomes can be cast in terms of social utility created, whereas financial outcomes can be treated in the usual sense of returns.

Diagram 1

This is illustrated in the graphic above which shows indifference curves for two types of investors. The lines represent points along the balance between social and financial returns that the two different types of investors will accept. Impact first investors are willing to accept a negative financial return if the social return is high. In contrast, financial first investors will accept low social returns in return for high financial returns. This analysis suggests there is an opportunity to meet the objectives of both types of investors, where the two indifference curves cross, which would be an impact investment that balances social and financial returns at just the right level to satisfy both financial first and impact first investors. An investment product that pitches at this point is likely to find the greatest demand in the market.

This makes it seem that there is a magical point at which all impact investors will get what they want. But that is likely to be illusory.

Conflicts of interest

Projects that are designed as impact investment projects often draw funding from multiple types of investors, all of whom could be interested in impact investing. However, differences between these investors can lead to conflicts of interest.

Consider a waterfall of different forms of investment in a potential social impact project (shown in the graphic alongside). This kind of capital structure would work for several types of project such as schools, hospitals or employment-generating factories.

Diagram 2The conflicts arise because all forms of investment involve risk. In impact investing, the risks are to both the financial returns and the social returns. For whatever reason a project may fail to achieve its social objectives, just as it may fail to achieve its financial objectives.

At the different extremes of this cascade you have donors and debt providers. Donors do not expect any financial return, in fact the money they contribute will never be returned. At the other extreme, debt providers are usually using the money of depositors or low risk investors such as pensioners and require fixed returns in the form of interest.

As a project is implemented and intended outcomes are not achieved, the strategy has to be amended. A donor would insist that the social objectives are given priority, whereas a lender would insist that the financial objectives are given priority. Indeed, one can imagine a scenario where in the case of weak financial performance, the donor’s money is being used to pay interest to the lender rather than on social outcomes.

There are some potential institutional structures that can deal with these conflicts. Some include:

Focus: Only use one type of financial instrument, for example, donor grants.

Satellite model: Ring fence donors in one entity responsible for one outcome, with other forms of capital in a separate entity that provides complementary services.

Financing lifecycle: Use donors for the initial phase, for example during setup or to fund research and development. Different funders are introduced at the point of scaling up the project.

In addition to the conflicts between funders, there are potential conflicts between managers and funders. Managers may have different priorities and have an interest in ensuring the financial sustainability of the project. If financial returns are under pressure, they may well prioritise efforts on financial returns rather than social returns.


It should be clear from these considerations that one of the important issues in impact investing is measuring the social returns. Financial returns are comparatively easy to determine and there is a well-established institutional structure, from auditors to financial markets, to monitor financial performance. It is much less clear how social returns should be determined. This is a lively area of debate in academic and practice circles and there are many ideas on how social returns can be measured. In some cases, very simple measures are effective – for example, specific health indicators can be used in the case of early childhood development. But many projects have less tangible and difficult to measure outcomes. They also have to be guarded against manipulation to ensure that any measures are appropriate and independent. Projects must ensure that they signal their social returns to stakeholders. Investors must monitor and evaluate impact. These create a residual loss to both social and financial returns as monitoring costs have to be incurred. Effective evaluation and monitoring is essential for impact investing to be a credible alternative. I think it is also important that investors themselves have access to information to assess effectiveness directly – the disciplinary effect of investors seeking to maximise social impact is important to drive innovation.

Who should be impact investing?

Any investor might be interested, though currently regulation would be an obstacle in some cases, such as pension funds, when it comes to more innovative structures. One clear investor type that would suit an impact strategy is foundations. These usually have an endowment, such as a portfolio of assets, that generates returns which are then used to fund philanthropic activity. There are several examples in South Africa of family foundations (like the DG Murray Trust), black empowerment foundations (like the FirstRand Empowerment Foundation) and renewable energy project-funded community foundations. While these can have restrictions on what they can do with their portfolios, for instance, requirements to remain invested in legacy instruments, there are opportunities to use their portfolios to add to the impact that grant making supports. For instance, a foundation can invest in education-focused impact investing as part of its asset portfolio, in addition to making grants that support educational outcomes. To my mind, foundation portfolios should all be considering how impact investments can be included within an overall investment policy, which can additionally include socially responsible investing screens.

But it should not stop there. Some asset managers (for example, Ashburton) offer impact investing funds that any member of the public can invest in. In due course, policy changes may allow for more institutional money, such as pension funds and insurance companies, to be directed into impact investing funds. Already some of this money can find its way into impact instruments that are structured appropriately.

Role in South Africa

In South Africa there is a growing political debate about access to private capital to achieve certain public ends. One example is the issue of prescribed assets, which the ANC has announced in its election manifesto that it intends to investigate. Under a prescribed assets regime, institutional investors are forced to invest in certain designated instruments, usually a variety of government bond. This approach is rare internationally, with the Apartheid state among the only in history to use it. My view is that prescribed assets is a very harmful policy as it distorts markets and blunts the disciplinary effect that investors should be able to have through their choice of investments. Imagine how much worse the state capture era might have been if investors had been compelled to invest in SOE bonds…

Impact investment, in contrast, could play a more positive role. Such investments can include those pursuing defined public benefit objectives such as education or healthcare. As a matter of public policy, we are comfortable allowing tax deductions for donations to organisations that support public benefit activities, so the idea of defining such objectives is well established. We are also comfortable with the fact that individual choice dictates which particular organisations end up being supported. Public policy could encourage impact investment by allowing institutional funds to direct a tranche to it, as they currently do with hedge funds. It could also be earmarked for favourable tax treatment, for example by allowing impact funds to be included in tax free savings accounts for individuals.

Impact investing is not a panacea – to really address unemployment and inequality we need broad economic development far beyond what impact investing can achieve. But it can make a difference on the margin and with certain problems that are hard to solve through traditional investment or public spending. For those reasons, it should be encouraged.

“SA does have a consumer debt problem. But what we need are interventions that drive lenders into providing healthy forms of debt,” says Intellidex chairman Stuart Theobald. Read more in his Business Day column.

If the market spent half as much time fretting about education or health policy settings as it does for monetary policy settings, SA could well be in quite a different place, says Intellidex head of capital markets Peter Attard Montalto. Read more in his Business Day column.

Decreasing interest rates will not necessarily put SA in a better situation

This column was first published in Business Day

In some ways I preferred the period of 2005-2008, when Cosatu would march to the Reserve Bank and make demands to the governor. They were simpler times, with simpler demands.

The debate is growing again about the Bank “mistakes” and “outrage” being expressed at a lack of cuts. This of course is occurring within a larger dual-track debate over the role of the Bank — with some looking to weaken the institution for state capture purposes while others are simply concerned with stuck old records about neoliberalism.

A sensible debate can certainly be had with people who want an alternative vision for the Reserve Bank. But those who want to weaken it for rent-extraction purposes and remove the blockage during the state capture years need to be called out aggressively.

Setting aside the issues of constitutional mandate, nationalisation and overall politicisation, the broad argument for an alternative Bank modus operandi within the existing monetary policy committee (MPC) mandate is that lower rates would support growth without much impact on inflation.

This is broadly the view in the market among foreign but particularly local investors, and the so-called Sandton Consensus of interest market makers. We need to stress-test the current monetary policy setting in several ways to see if it really is deficient.

First, what successes is monetary policy currently having?

Inflation expectations that used to be so volatile above target have, since 2014, become less volatile and slowly converging towards 4.5%. This is a key success of monetary policy as broadly conceived, which is a mixture of the interest rate set and the communications around it.

The “steady as she goes” thoughtfulness of the MPC, the strong string of common rhetoric between MPC meetings and indeed between governor Lesetja Kganyago and former governor Gill Marcus has sunk in to economic agents.

Lower inflation expectations reduce uncertainty for retailers who can then run tighter margins to the benefit of consumers. Meanwhile inflation pass-through from a range of factors has been at historic lows. This includes from the exchange rate into core inflation, from the VAT and other tax hikes, from oil price rises via petrol into wider prices. It is still too early to tell the impact of minimum wage hikes into wider prices but beyond the service sector pass-through here may be somewhat muted as well.

This is a significant success for the Bank and increases the welfare of consumers. While wider structurally lower growth may be partly an aid, previous bouts of low growth over history have not impacted pass-through to such a strong degree.

There are arguably two routes that price formation can take during heightened policy uncertainty such as under the Zuma years: either become more volatile as uncertainty rises if monetary policy is not credible, or become less volatile with lower pass-through as credible monetary policy.

The Bank has also helped itself (and currency volatility) by having a firmer, clearer line on currency intervention. The Bank has been increasingly clear since 2008 on its policy that it will only intervene where a breakdown of the orderly functioning of the balance of payments is occurring and not regarding levels of the currency. Once this had eventually sunk in, arguably currency markets become more efficient without the dead-weight loss of excessive speculation of Bank intervention. This in turn likely helped indirectly to anchor inflation further.

We need to also consider what good a rate cut would do and balance the costs and benefits. In isolation, it could be argued that a cut in rates would have no impact on inflation and help growth given pass-through is low.

However, a cut in rates in an environment of increasing political pressure on the institution would have a serious credibility impact and risk losing that low pass-through over time — it would also act as a ratchet effect with pressure for one cut followed by another.

It is also doubtful that small cuts would have any significant impact on current growth here. While the argument that short-term rates do not affect long-term potential, growth has become embedded and the Bank has largely won the argument with consistent communications on this issue, the short-run argument is less well rehearsed.

There is very little evidence that low growth has anything to do with monetary policy. The World Bank and World Economic Forum as well as various consultancy surveys point to a vast array of other issues, including the lack of structural reforms, political and policy uncertainty, labour market problems and lack of electricity, as all far higher on the list of concerns.

Banks have broadly saturated the economy with as much credit as they can, given the current structural problems in the economy, and would not adjust supply simply because of rate cuts — customer credit quality would not change.

Demand for credit would increase slightly after a rate cut but arguably, especially investment decisions, are being made on much larger structural issues rather than a 25-basis-point difference in the cost of credit.

In areas such as renewables technology, cost compression is driving much more than cost of credit changes, with a lack of political leadership the blockage on that front.

The current policy setting is based off a long-term view of inflation anchoring. Yet the current stance that says policy is broadly fine here and no future large moves are expected (subject to watching the data) while policy is slightly loose gets a lot of flak despite broadly making sense. This will be the key communications battleground for the Bank at next week’s monetary policy review.

The criticism is that current real policy rates are far too high at around 2.45%. Yet such a view is bizarrely short-termist, looking only at current interest rates and current inflation rates, which monetary policy cannot affect. If one looks at inflation about 18 months out, then real rates are actually 1.65%.

Markets then criticise the Bank for not cutting rates when the long end of their inflation forecast is at the centre of target of 4.5%. Yet it is only there before the Bank artificially massages it there with a hike.

The fact that the MPC is not hiking as the model says shows that they think the long-term risks of inflation being just a little bit higher are acceptable and so while aiming strongly for the centre of target are not overzealous.

The Bank’s ultimate problem is the fact it is so forward-looking versus a market that is so “now now” (or even backward-looking at data). Mix this in with a little risk aversion and the lack of much point in moving rates in either direction and so the current monetary policy stance seems entirely appropriate.

If the market spent half as much time fretting about education or health policy settings as it does for monetary policy settings, SA could well be in quite a different place, with a greater impact on growth.

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

Intellidex is constantly monitoring the legislative and regulatory changes occurring in Parliament and elsewhere that affect the financial services sector clients. Intellidex social media editor Mayo Twala chatted to Intellidex’s head of capital markets, Peter Attard Montalto, about the last five-year term of the fifth democratic Parliament and its effect on the financial services sector.

What were some of the highlights and lowlights of the last Parliamentary term? How would you characterise the work of Parliament with respect to financial services?

Parliament really started to come into its own through the latter two-and-a-half years of the last term. State capture and immense pressure from civil society enabled a partial awakening of its senses and its powers to hold to account and interrogate legislation, institutions, politicians and policy makers. However, looking back we can actually see that Parliament passed relatively few pieces of financial sector-related legislation in the five-year period. Much time was concerned instead with processing biannual budget updates and accompanying votes and bills, and then investigation work, particularly for the Standing Committee on Finance, into SARS, PIC, the audit profession, carbon tax, VBS, Steinhoff, ABIL, Viceroy, SOEs and more. This work has been positive and necessary though the capacity of the state or Parliament to do much with the outcomes of these deliberations is still in doubt as we move towards the sixth Parliament.

The major, landmark, set of two pieces of legislation taken together were the Financial Sector Regulation Act 9 of 2017 and the Insurance Act 18 of 2017. Together these created the twin peaks regulatory framework which was subsequently enacted from 2018. This was a mammoth reorganisation of the institutional framework of the state which Parliament had to process under National Treasury’s watchful eye.

Apart from that there was the Banks Amendment Act 3 of 2015 which sought to strengthen the creation of the curatorship process for insolvent banks under SARB’s eye, the National Credit Amendment Bill (soon to be Act after presidential signature) which incorporates a new form of personal insolvency into law and the Financial Matters Amendment Bill (again soon to be Act) which in addition to some minor changes, enables the creation of state-owned banks.

Parliament spent a huge amount of time working on illicit financial flows which is a hugely important issue, but it is exceptionally tough for Parliament to do anything about and requires supranational, state-to-state co-ordination. Far too little time was also spent on fintech or the fourth industrial revolution which seems to have largely passed the standing committee by.

How can we better understand the twin peaks regulatory model that began operating since April 2018?

On the surface twin peaks is nothing new, regulatory activities have always been occurring on banks and insurance companies. However what twin peaks does is organise this regulation much more systematically and empowers more directly in law the FSCA (Financial Sector Conduct Authority) and the Prudential Authority (PA, part of the Reserve Bank). This was important given the FSCA’s predecessor was largely “at sea” institutionally while within the Reserve Bank there was a somewhat fuzzy edge around the bank regulation department and other areas. The separate legal entity of the PA now provides a more cohesive structure institutionally with its own strategy and momentum. Insurance also fell through the gaps somewhat in the past but now is more firmly wrapped into the model. Overall twin peaks is about specialisation between the two peaks, co-operation, and a greater degree of independence from politics.

Has the twin peaks model worked in regard to strengthening the regulation and supervision of banking institutions?

It is in some sense too early to tell, but we have seen strong early momentum internally within the PA to define its corporate strategy and methods of operations. It is being built on a strong foundation of capacity and talent which is so evident elsewhere in the Reserve Bank. VBS has provided an early challenge, though that was mostly outside of its control. The reaction to such an early challenge however will be important and useful in how it puts in place intelligence and data collection systems, especially ones that are not totally reliant on auditors.

Kuben Naidoo (CEO of the new Prudential Authority) has provided the leadership and direction so crucial at this early stage and it was arguably fortuitous that he was in the right place at the right time for this role. The FSCA however has struggled and does not have the same depth of capacity. National Treasury should focus more urgently on ensuring a full bench of quality leadership beds in there so it doesn’t become the loose link in the regulatory chain.

Will the proposed Conduct of Financial Institutions Bill in the 2019 Budget create a single comprehensive law for the financial services industry in the long term?

Several bills and policy streams were left outstanding at the end of this Parliament. COFI will be a highly complex bill and probably take up significant Parliament time in the new term. Its fundamental problem is to what degree of legal and regulatory certainty a piece of legislation that works on principles and outcomes-based requirements can work within the South African legal system. It is still up for debate if this kind of shift is better encapsulated within the regulator principles of conduct and prudential management rather than primary legislation, as well as the sector charter process.

The end result is that the bill is unwieldy and at times unclear. This is especially the case regarding the increased flexibility on regulatory requirements and new forms of lite-licence that the bill allows. These can create uncertainty in the system and more challenging credit risk pricing for investors while potentially opening the door to future capture.

It is not clear within the bill that there is a firm set of minimum regulatory standards that cannot be compromised for transformation or development purposes – and this is likely to be the focus in the new parliamentary term when the bill comes before committee. Transformation is already well baked into the system through the charter process but also increasingly through the PA – which particularly for new entrant banks has been seen as being surprisingly active on the transformation front.

The Financial Matters Amendment Bill, tabled in Parliament in January 2019, allows for the establishment of state-owned banks. Only part of this got passed into law before the end of the term, what happens next?

Yes, the bill that has now gone for presidential signature allows only national level and not provincial or municipal level state-owned banks. This is a positive move given the huge breadth the bill as originally drafted would have allowed for across the country.

When combined with alternative regulatory-lite frameworks allowed in COFI, the key for financial stability and the sector as a whole will be that state-owned banks do not get off lightly and are regulated just as strongly as other entities. This has always been the Reserve Bank’s line and from their perspective it’s a credible stance. The risk however, which everyone in South Africa should be cognisant of, is “state-capture-proofing” legislation and institutions. The current threats to the Reserve Bank and the politicisation of the debate around it should be kept in mind – future state capture will rely on a pliant Reserve Bank as much for its control of the financial sector as for the MPC and monetary policy. As such it would not be positive if a combination of COFI and the FMA Bill were to create a nexus of risk on this front.

Ultimately, however, such banks would be at the behest of markets for funding and so their balance sheets will need to be carefully studied by corporate treasurers, existing banks from a counterparty risk perspective, and investors. We watch this issue closely and will see if the next round of the bill returns with more localised state-owned bank provisions.

Can the South African financial services industry see a large push towards fintech if the Reserve Bank, FSC and Financial Intelligence Centre regulate it in a controlled environment?

The simple answer is that it will be tough. Not enough attention has been focused on this by Parliament. Currently there are very high hurdles to entry even with the PA’s sandbox, in major part because exchange controls keep things largely local. Exchange controls in particular are on a very long-term loosening trend and in the coming years fintech should be the issue to accelerate on that front.

However, adding in a debate on prescribed assets as well together with the wider immigration, visa and skills problems, we think more focus will be required in order to accelerate development in this field. Regulators should welcome some aspects of fintech, such as enhanced security and lower costs for consumers and the ability for automated real-time reporting to regulators. We expect a focus on this to grow in the new parliamentary term.

With the last term of Parliament closed, do you think that the financial services industry has been supported regarding the above legislation?

Supported doesn’t really seem to be the right word – but the financial services sector now sees better and clearer delineation of regulatory oversight. The political environment however remains hostile to the financial services sector. Criticism of banks often is unconstructive and based on partial or no facts at all. Too often the financial sector feels like the “enemy” when watching parliamentary committee hearings. While certainly the sector needs to do more to transform and support harder-to-reach places in the economy, economies of scale help this more than anything else. There still seems to be a basic lack of understanding that banks are not on strike and are lending as much as they can given the creditworthiness of clients within this part of the economic cycle. This however is unlikely to change in the new term and it will be a continual battle of the sector and regulators to keep Parliament from stepping over the line into populism.

What themes will be coming next for Parliament in the sixth term after the elections?

The biggest and most dramatic theme will be Reserve Bank nationalisation which should become an active topic for Parliament straight after the elections. Prescribed assets – being in the ANC manifesto – will also raise its head though it’s hard to see how that would move forwards without the backing of National Treasury.

Both issues can create significant uncertainty for markets and the financial services sector even without implementation. Parliament and especially the ANC caucus will be the nexus of both issues.

We will then have the COFI bill and possibly another bill taking further bank resolution frameworks, including living wills and bail-in bonds. More generally, Parliament is likely to continue its investigatory role with illicit flows being high on the agenda, but bank funding of coal and other related environmental matters will be a hot button topic.

Support for municipalities increasing borrowing and issuing debt will be on the agenda and so too the role of financial services role in that (not necessarily a good thing given their inherently low and declining credit quality).

We are also watching for more debate in Parliament on transformation in the sector and consumer fairness – a number of recent court cases rulings about, for instance, foreclosure and collateral (house) auctions may well find themselves into legislation either via government or private members bills.

We also watch with some concern the capacity of Parliament. The parliamentary budget office which supports the work in this area is severely under-capacitated and lacks skills, while the DA could lose some of its strong committee members on these issues while the talent bench on the ANC side remains mixed. One potential strong new addition to the standing committee on finance could be Ronald Lamola, who is placed very high at number five on the parliamentary list. He would be one of the few “policy wonks” in the ANC caucus in Parliament.

Intellidex helps a range of financial services institutions tackle their strategic challenges – get in contact to discuss how we might be able to help your company.

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Collapse of National Prosecuting Authority, consulting by auditing firms and denuding of financial journalism have contributed to opening the floodgates to unethical behaviour

This column was first published in Business Day

Something is rotten in the state of corporate SA. Steinhoff is the obvious example of grand-scale theft, but much else lurks in its shadow.

Construction firm Group Five is bankrupt, one-time technology sensation EOH is plagued by corruption allegations that have scared off key partner Microsoft, sugar producer Tongaat Hulett is in trouble over land sales it banked as revenue, investment holding company Brait is a pariah for bailing out management for a share scheme that was R2bn in the red, pharmaceutical giant Aspen is flogging assets to try pay off an unsustainable debt pile, and property empire Resilient is being dogged by allegations of share price manipulation.

All of those have wreaked havoc on shareholder wealth.

These facts please some. Those on a smash-and-grab spree through the public sector love nothing more than to denigrate corporate SA. It is an attempt at a false equivalence, the scoundrel who declares “I might have done bad, but you did too” without realising the acknowledgement of guilt, a fallacy captured by the lovely Latin term tu quoque.

But we are grownups. And we must ask ourselves if something is going wrong in corporate behaviour, irrespective of how others might latch on to the conversation. Of course there has always been malfeasance and it is difficult to say scientifically whether the current spate is just more of the same, or reflects some fundamental shift in the system. Increasingly I am convinced it is the latter: something important has changed.

Many things contribute to behaviour. Thousands of pages have been written on incentives, but that seems to miss something else important: ethics. The incentives debate stems from the school of rational choice, in which all behaviour reflects the rational calculation of optimal strategy to achieve specified goals. But ethics has filled many more thousands of pages, from the ancient Greeks to today. Being ethical is a virtue irrespective of what incentives you may face. And that has increasingly been neglected in business.

Even if we accept incentives are enough, many checks and balances have eroded. The commercial crimes investigation and prosecuting capacity of the state has collapsed. Until the National Prosecuting Authority (NPA) gets its act together, SA will remain one of the easiest places in the world to get away with complex financial crime.

But there are many other role players. The accounting profession, while never perfect, has fallen dramatically. It seems that every two decades or so accounting firms cycle from being audit-focused to playing corporate adviser. As soon as this conflict leads to some or other collapse — the bubble, Enron, the financial crisis — firms excise their consulting arms into separate entities and focus returns to the audit function. We are again at the point when consulting arms need excision.

Another check is financial journalism, though it has been denuded of the resources it had two decades ago. Some exceptional individuals persist in working hard to expose malfeasance, proving in the process that incentives aren’t everything.

Another key part of the puzzle are shareholders. Public financial markets, like that which the JSE provides, are a powerful disciplinary tool. When companies do bad or badly, their share prices are pummelled. An efficient market provides the mechanism through which this works. All those companies mentioned above have indeed had their valuations thrashed, by 65%-98% of their former highs.

A share price thrashing can be too little, too late. If shareholders were more vigilant and more active in conveying their views to companies, companies might not get themselves into trouble. Shareholders’ authority over boards of directors should mean there is never a board that compliantly nods at the management’s version of the truth.

But shareholders too have been denuded of resources, with the growth of passive investment funds putting pressure on all institutional fund managers to cut costs. Fund managers have cut back on the use of external analysts to provide them with research and in the process the number of people actively interrogating companies has fallen, with those left forced to cover more, and inevitably less deeply.

It is all somewhat depressing because the solutions are not obvious to see. Certainly we need a more active NPA, and perhaps we may get a post-election ANC that delivers one (though the party’s parliamentary list contains many individuals who would detest it).

The financial media might find a new business model that re-equips it to provide a well-resourced fourth estate. Competition and regulation will force accounting to firms to rebuild public trust.

The capital markets, too, will rebuild mechanisms to discipline companies. These will not be from within the traditional institutional shareholder world, but rather from activist hedge funds and individual investors, attracted to the profit opportunities that inefficient markets provide. Such activists might be better at the task than institutional shareholders have ever been, even when their nests were much better feathered. All this, though, will take time.

And to make it resilient, we must put ethics back in the centre of corporate leadership, there as the backstop in any incentive system, by vigorously ejecting those who are found wanting.

• Theobald is chairman of research and consulting firm Intellidex.

Intellidex chairman Stuart Theobald interrogates the rotten state of corporate SA. Featured in his Business Day column out today