News in South Africa 27th February:

1. Major new financial laws:

The highly anticipated Conduct of Financial Institutions (COFI) Bill is set to have major ramifications across several industries.

Major new financial laws

Although the Bill is unlikely to be tabled before Parliament rises ahead of the elections on May 29 2024, marketplaces are both excited and cautious.

The Bill aims to consolidate thousands of pages of disparate financial legislation and create a single standard of industry conduct.

This will impact financial institutions, such as banks, insurers, credit providers, and financial advisors, and non-financial institutions, like retailers, fintech, telcos and other organisations providing financial services. 

“A lot of work and consultation has gone into this legislation with a number of work streams closely examining the existing institutional legislation and the impact of the new law,” said Mpho Sadiki from Network International.

“It gives regulators the scope to govern institutions based on their activity. With the introduction of the Bill, the conduct of every institution that participates in the provision of any financial service product will fall under the oversight of the regulator.”

Although some in the industry have expressed concern over the additional regulatory burden, Sadiki said this was an incorrect way of looking at things.

Instead of a current sectoral approach, where 13 separate laws are applicable to licenced institutions, COFI provides for an activity-based approach.

This means that all similar activities will be uniformly regulated and supervised, irrespective of the type of institution performing the activity. 

“COFI is a big deal because it removes the limitations of who can provide services, opening up participation and injecting some much-needed competition and innovation into the industry while still ensuring the industry guards against fly-by-night outfits,” Sadiki added.

“By creating a level playing field, the legislation allows for rapid deployment of new products that can only benefit the local consumer.”

More competition:

The new Bill is also expected to boost financial inclusion, with the new instant payment system PayShap a prime example of how COFI will deliver immediate benefits.

“Vision 2025 (the SARB’s goal to increase electronic payment literacy) speaks about the need for better financial inclusion. For this to reach scale, we need to quickly create access to more financial products – and this requires competition.”

“We have gone on this journey of modernising payments and building this brilliant capability that is able to facilitate instant payments.”

“But right now, only registered banks can participate. With COFI, more than just the banks can get involved to originate and receive payments, driving competition in the market and benefiting the consumers and building trust in the entire financial system,” he said.

This more inclusive approach is expected to help South Africa transition to true “open banking.”

“COFI stands to offer our industry far more opportunities than whatever inconveniences may come with revised or new regulations.”

2. Investment falls:

Businesses are not interested in investing in South Africa’s weak economy, which is plagued by structural issues such as load-shedding and logistics backlogs. 

This is feedback from Nedbank, which released its updated Capital Expenditure Project Listing for 2023, showing a massive decline in fixed investment activity across the year.

The value of new projects announced amounted to R148.8 billion. This is a sharp decline from the R392.7 billion and R259.9 billion in 2021 and 2022, respectively.

Nedbank economist Crystal Huntley explained that they track the value of projects announced in the previous year to give some indication of the level of infrastructure buildout for the coming years. 

The massive decline in both the value and number of projects, from 67 in 2022 to 51 in 2023, highlights the difficult operating environment in South Africa for businesses and the uncertainty created by the upcoming elections. 

“The slowdown resulted from a moderation in new projects announced by the private sector and public corporations. Projects announced by the private sector fell to R56.1 billion from R203.3 billion, accounting for only 30% of the total,” Nedbank said.

“This is shocking, really. It will have a tremendous impact on the economy,” Huntley told CNBC Africa

Nearly half of the projects announced by the private sector involved the shift to renewable energy sources, with projects cumulatively valued at R27 billion.

This forms part of what Standard Bank chief economist Goolam Ballim refers to as ‘subsistence investment’. 

Subsistence investment from businesses is capital expenditure used merely to keep the business running and not for growth and expansion. 

“What it reflects is the context of a very weak domestic economy. What is being seen is the effect of struggles experienced structurally within the economy,” Huntley said. 

These struggles have resulted in declining confidence from businesses and households in the South African economy, making them hesitant to invest locally. 

“You are going to see businesses step back and be unwilling to invest in South Africa’s weak economy.”

Huntley added that Nedbank forecasts fixed investment in South Africa to continue to slow in 2024. 

However, investment should pick up again in 2024 due to spending on renewable energy projects from the private sector and the end of uncertainty surrounding the national elections. 

3. New bill to ‘hinder’ infrastructure delivery:

South Africa cannot afford to have the new Public Procurement Bill signed into law in its current form because it will hinder rather than support the infrastructure delivery challenges facing the country, Consulting Engineers South Africa (Cesa) has warned.

Master Builders South Africa (MBSA) similarly believes there are serious challenges with the bill in its current form.

MBSA says the bill is unconstitutional and susceptible to legal challenges in its current form, blurs the lines between the executive and legislature, and gives the minister of finance unfettered power to make regulations, which is beyond the mandate provided by the constitution.

Cesa CEO Chris Campbell agrees, saying it is “highly likely” there will be a legal challenge to the bill if it is passed in its current form and becomes law.

MBSA executive director Roy Mnisi said in terms of the bill, the discretion of the minister of finance is unfettered, which will be unconstitutional.

Priorities, objectives?:

Campbell said Cesa believes the bill in its current form will hinder rather than support infrastructure delivery in South Africa, particularly as procurement will seemingly be done on who is the lowest bidder.

He said procurement should be looked at from a much broader perspective, including deriving value for money and not necessarily gravitating to the least cost but also factoring in the life-cycle costs of infrastructure or a capital item.

“If you look at the section under preferential procurement, the shortcomings in this bill will simply lead to more court challenges that then make the process come to a grinding halt,” he said.

Minister of Finance Enoch Godongwana referred to the bill in his budget speech last week but did not touch on any of the criticism of it.

However, he admitted that government is “well aware that currently, procurement processes often fall short of delivering the most cost-effective solutions to government’s needs”.

“Too often, there is a substantial disparity between the prices government is being charged and the prevailing market prices.

“Given that government buys in large quantities, we should in fact be paying less and leveraging our buying power to get more value for our money,” said Godongwana.

“Obtaining value for money, as well as the principles of efficiency, transparency, and competition, remain paramount.

“And we want to assure South Africans that these principles are not incompatible with transformation,” he said.

4. Govt turns to private sector for help:

South Africa’s government is increasingly turning to the private sector to help mitigate some of the country’s biggest problems.

National Treasury has now opened two proposed amendments for public comment, with the aim of making it easier for Public-Private Partnerships (PPPs) to be set up.

In 2023, President Cyril Ramaphosa and the CEOs of over 100 of South Africa’s most prominent companies, including Standard Bank, FNB, Woolworths and MTN, announced a partnership to fix South Africa’s three biggest issues – crime, energy and logistics.

Increased private-sector participation has already been seen in the energy sector, with over 5,000 MW of private generation keeping load shedding at lower levels during the day.

In terms of logistics, Transnet has also seen increased private-sector participation in upgrading Pier 2 of the Durban Container Terminal to improve private investment in equipment and enhance technological capability and operational efficiency.

During the 2024 Budget last week, Finance Minister Enoch Godongwana announced that third-party access will also be given to Transnet’s freight rail network in May of this year.

National Treasury has also drafted amendments to key regulations regarding the Public-Private Partnerships (PPPs) framework.

Treasury has now opened the amendments to Regulation 16 of the Public Finance Management Act and the Municipal PPP Regulations for public comment.

The amendments aim to reduce the processes required for planning and producing PPPs, resulting in simpler regulations that align with a project’s size and complexity.

For instance, the new regulations make provisions for the setting up two pathways for PPPs – one for high-value projects and a simplified arrangement for low-value (R2 billion) projects.

The new regulations also clarify the institutional arrangements over who is responsible for what during a PPP project cycle.

Treasury added that the amendments make it easier for the private sector to engage with investment opportunities while accounting for all the risks of PPPs.

There are also amendments to improve the discipline in project execution by restricting the ability of accounting officers to cancel good projects while providing greater security to investors.

Lobbyists Business Leadership South Africa (BLSA) has welcomed the Treasury’s decision to reform infrastructure financing and delivery mechanisms.

Economists often cite investment in infrastructure as a sure-fire way to kickstart GDP growth, which South Africa’s economy is in desperate need of as it is only expected to grow by a paltry 1.0% in 2024

5. AI boosts SARS revenue collection:

Last year, the Minister of Finance allocated R1-billion a year (over three years) to the SA Revenue Service (SARS) for its modernisation programme. SARS commissioner Edward Kieswetter says the use of AI and proactive measures have resulted in the recovery of R210-billion for the first 11 months of the current tax year.

“When the economy is doing well, people tend to more easily pay their debt due to SARS. Compliance behaviour is directly linked to the general mood within the country and particularly the economy,” he says.

“In the current environment, where we have seen millions of job losses, and inflationary pressure, people tend to close ranks and hold back on SARS payments,” Kieswetter says.

There has been an increase in SARS debt, which now stands at an undisputed R300-billion.

“The R300-billion is what is owed by people who are not denying or disputing that they owe the money. They simply don’t have the money, or they have reprioritised their spending and SARS is not very high on the list.”

Kieswetter says one of the areas where SARS uses artificial intelligence is debt propensity modelling.

“This is where we build machine learning algorithms to go through the entire textbook and to highlight instances where there is the highest propensity to recover the debt, and with minimum resources. We then focus on those entities.

As at 31 January, SARS clawed back the R210-billion for the current financial year through the following interventions:

  • R70-billion from AI/debt propensity algorithms. This resulted in the closure of almost 2.1 million cases of debt; the issue of more than 100,000 final letters of demand, and almost 24,000 civil judgements.
  • R67-billion from the use of data science. SARS used data science to evaluate around 14 million income tax, VAT and company returns received by the end of January. “Only 1.5 million were flagged as high risk. We have about 550 auditors who work through those returns, engage with the taxpayers – that engagement results in a final verification,” Kieswetter says.
  • R57-billion from refund risk management. This is where SARS acts to prevent refunds that are either fraudulent or not permissible. Kieswetter says the biggest culprit is VAT returns, and by the end of January this year, SARS prevented R34-billion of impermissible/fraudulent VAT returns; R13-billion of impermissible/fraudulent personal income tax returns and R10-billion of impermissible/fraudulent corporate tax returns.
  • R9-billion additional taxes were recovered from potential customs fraud. This occurs when people either import illegal goods (cigarettes, narcotics, medicines) or misdeclare (understate) the value of legal goods they have imported. By the end of January, SARS stopped and seized 5,500 instances of cargo with a declared value of R5.1-billion. This process also yielded almost R8-billion in fraud detection and leakage prevention for customs.
  • R5-billion was recovered from almost 850 illicit trade (tobacco and alcohol) interventions that resulted in 550 detentions and 160 seizures.

All information sourced from articles posted by: BusinessTech, DailyInvestor, Moneyweb, and Daily Maverick.

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