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 

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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.