Category Archives: creating value

Symmetry and savvy

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The DA is quite negative on the new taxes proposed for the mining sector. They seem to argue that higher taxes will discourage employment and investment.

I haven’t analysed the details thoroughly so maybe they are correct. I suspect that it’s more dogmatic following of views from those who don’t understand the pros and cons well enough to change their mind.

For example, if higher taxes are bad for employment and investment, surely lower taxes would be good for employment and investment? I doubt that the DA is arguing that the current level of taxes is exactly optimal, so shouldn’t they have been campaigning more loudly for lower taxes?

The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses. The lower after-tax profit may also push  operations with marginal rates of return to below the required hurdle rate of some investors, reducing total investment in the sector.

This is, of course, true for all taxes. Hopefully there aren’t too many people left who believe that taxes should not exist.

So one real question is whether the tax rate is optimal, given the funds that can be directed towards government revenues in general and to specific employment creation and industrial development programmes specifically.

A second real question is whether the “price” for the permanent removal of natural resources being charged is appropriate (a combination of taxes and royalties) and from a philosophical perspective, who “owns” our country’s natural resources?

This leads to the third question or point that the DA really should be more aware of. Nationalisation, the Freedom Charter, and vast income inequalities are all part of a potent political conversation in South Africa. With nationalisation almost entirely off the table at the moment, being able to demonstrate in some manner that the “riches under the ground” are better being shared with everyone is an important political point to counter the more extreme political views.

The DA, in this instance, is blind to the subtler political benefits of this approach, blind to the definite benefits of increased revenues, blind to the possible benefits of focussed attention on this industry cluster, but completely convinced of the first-year economics free market principle of “tax leads to deadweight loss of consumer and supplier surplus” and thus lower employment and investment.

No nationalisation, more certainty and probably higher taxes

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There are times when I’m impressed with elements of government and the ANC. It took them far too long, they allowed too much debate and uncertainty, but their ultimate conclusions on nationalisation and how to direct additional mineral wealth back into the fiscus, further develop a beneficiation industry around the mining industry are solid.

I always maintained that “nationalisation” isn’t necessarily appropriation of assets without compensation, although the popular views and worst fear-mongering viewed this as the only possibility. It’s refreshing to hear that “nationalisation” was considered on its merits against private operation of firms rather than just as a way to redistribute wealth. (Ok, at least one article wasn’t mad panic.)

The increase in taxes is also basically expected. Although new and changing taxes does add uncertainty, it provides a sense that the rules are being followed.  Tax rates on energy companies in many Middle Eastern countries is high – sometimes near 50%. So the government fiscus does benefit from the energy that belongs to all its citizens.

It’s also a, slightly sneaky, way of re-settting historical land ownership and mineral right royalties and licensing. If “we got it wrong and sold them too cheaply in the past, we can always recoup through higher or new taxes”. Maybe a little cynical but not surprising.

The real free market fanatics will no doubt be in uproar about higher taxes destroying jobs and misallocating resources. There is a debate here, but the free market fanatics all too quickly forget that it’s hard to argue that the value of the minerals under our country have been fairly priced. Those markets can easily be described as “failed markets” with a number of externalities involved.

Even the hardest neoclassical economist will recognise these are very real limitations on Adam Smith’s invisible hand.

Lose a Million

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The Make a Million competition, as I’ve mentioned before, is an awful idea. It doesn’t promote investing or even “normal” trading, but rather massive, speculative risk-taking trading because the prize for performing well is nothing and the prize for performing best is significant.

I’m continually disappointed that Moneyweb continues to partner with this distraction.

As I’ve done in the past, I’ve analysed very quickly some of the results of the most recent competition. As background to that, the basic rules are:

  1. Put up R20,000 of your own money
  2. Trade over three months in currencies, commodities single stock futures and some index trackers.
  3. Whoever has the most at the end wins a million rand
  4. Everyone keeps what is left of their initial “investment”

So let’s be clear, there are no long-term investment learnings here.

The winner did return 165.5% over 3 months, which is not an impressive performance even though it might look like it.  The point is, given the volatility of the investment universe available for the competition and the encouragement towards rampant risk-taking, it’s entirely pedestrian performance.  It’s very likely an individual’s performance will be good given the wide range of possible outcomes.

Let’s look at some other statistics

Average performance -18.4%
Annualised average performance -73.4%
Proportion making a profit 26%
Total amount won -R1 020 762
Standard Deviation of performance 48.0%
Annualised standard deviation 96%

These are not performance statistics of which to be proud. They are similar to the losses incurred in prior competitions.

So in short, the competition cost the entrants in total just over a million rand. Losing a million rand is a great way to Make a Million.

Narratives vs facts

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I don’t usually write about The Final Frontier, but this article has a great parallel to what I do write about.

It’s worth reading the entire article, but the main message is that we cannot use the dream or story or fairy tale of imminent migration into space and other planets as an excuse not to deal with the very real problems we have on Earth right now. The misconceptions, Hollywood induced and otherwise, about the ease of space travel or even the extent of our current capabilities, are massive.

As with so many things, the stories that fill our society can be very different from the harsh reality.

Communicating harsh truths

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Communication is critically important for any business. Communication with clients and employees defines those relationships and the value they can create for everyone.

Managing poor performance is tough because it’s so easy and so attractive to shy away from communicating the truth. Avoiding conflict and not addressing problems is far worse for all concerned.

Robert Kiyosaki, author of “Rich Dad, Poor Dad” outlines a similar viewpoint in response to research that shows “nice guys earn less than mean guys”. His take is that it’s not actually “nice” to hide the truth and dance around issues. There’s never a need to make attacks personal, but sometimes the news is not good and it needs corrective action.

As Kiyosaki says, “cowards finish last”.

Gordhan doesn’t know what tax is

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Pravin Gordhan is on record saying NHI won’t increase tax burden.

He clearly doesn’t understand income and expenditure. If government spends more, more tax must be collected. If employees don’t pay the tax, employers must pay the tax. If this is directly related to labour, you’ve just increased the cost of labour without a commensurate increase in productivity. Labour less attractive, fewer jobs.

The only way for NHI to not cost is if it replaces current health expenditure, in which case it’s about using funds more effectively. This is not the message I’m hearing.

Costs, prices and efficiency. In the Dark.

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I’ve blogged before that it’s more the cost of electricity and the efficiency of its generation that we should be concerned about rather than the price we ultimately pay. From a national perspective, we pay generation and transmission costs regardless of what the price on our bill is. The profit or loss comes out of our taxes after all.

Today there’s an interesting story that Joburg City Power marks up Eskom prices by 117% when calculating charges for their customers. Well, again, if City Power makes a profit it should in theory be reflected in lower other costs for Citizens.

It does make me wonder though, is this mark-up needed? If so, what is driving the additional costs? Inefficiencies, fraud, non-payment by some come to mind. So it’s still true that we should be looking critically at costs rather than superficially at prices charged.