In episode #38 for 22 Febraury 2012 we chat to:

* Marc Ashton, editor of Finweek, on this week’s cover story by Bruce Whitfield – The Ego has Crashed;

* Henk Viljoen, from Stanlib, on our Budget 2012 coverage;

* Ian Lourens, CEO of Onelogix, on results (vehicle delivery doing very well);

* James Templeton, CEO of Emira Property, on results (office space still tough) and

* Wayne Samson, CEO of Ellies, on greening your home for free

*An expansion in infrastructure investment is one of the central priorities of the 2012 Budget. The Budget Review lists 43 major infrastructure projects, adding up to R3,2trn in expenditure. Over the three-year period ahead, approved and budgeted infrastructure plans amount to R845bn.

*Special emphasis is given to improving competitiveness in industry, investment in technology, encouragement of enterprise development and support for agriculture.

*Economic growth forecast to slow from 3,1% in 2011 to 2,7% in 2012, increasing to 4,2% by 2014.

*Consumer price inflation to rise from an average of 5% in 2011 to 6,2% in 2012, declining to 5,1% in 2014.

*Current account deficit to rise from 3,3% of gross domestic product (GDP) in 2011 to average 4,4% over the next three years.

*Employment is growing – 365 000 jobs were created in the year to December 2011 and unemployment fell to 23,9%. However, employment hasn’t yet returned to its 2008 peak.

*The global environment remains highly uncertain, with much of Europe in a recession. Global output is projected to expand by 3,3%.

Budget framework

*Total spending will reach R1,1trn in the next fiscal year, representing some 32% of GDP

*Additional R55,9bn in government expenditure plans over the next three years from earlier projections

*Real growth in non-interest expenditure of 2,6% over the medium-term. This rate of growth brings spending in line with long-term revenue trends

*Budget deficit of 4,6% projected in 2012/13, 4% in 2013/14 and 3% in 2014/15

*National government net loan debt projected to reach R1,5trn in 2014/15. Public debt will stabilise at about 38% of GDP

*Debt stock and interest costs as a percentage of GDP to stabilise over the medium term

*The public sector borrowing requirement – which takes into account state-owned enterprises – will be 7,1% of GDP in 2011/12, and will decline to 5% in 2014/15 before rapidly rising again as the infrastructure programme of government accelerates.

Tax proposals

*Personal income tax relief of R9,5bn takes account of inflation and provides modest real tax relief

*Tax incentive to encourage savings. Consideration is being given to the introduction of tax-exempt short and medium-term savings products. The current tax free interest income thresholds will be reviewed and possibly phased out as part of this reform.

*Reforms to medical scheme contributions and retirement savings deductions

*Tax relief for micro and small businesses

*Dividend withholding tax introduced at 15%. Pension funds will benefit as they will receive dividends tax free.

*Capital gains tax increased with effect from 1 March 2012 from 25% to 33,3% for individuals and special trusts. For companies and other trusts, the rate is increased from 50% to 66,6%.

*Tax relief is proposed for housing developers and employers who provide housing below R300 000 a unit

*A packet of 20 cigarettes will cost 58c more

*A litre of wine will cost 18c more, a 340ml can of beer will cost 9c more and a 750ml bottle of spirits will cost R6 more

*General fuel levy increase of 20c/litre and 8c/litre more for the Road Accident Fund

*Electricity levy increased by 1c/kWh

*Further measures to include tax compliance are introduced

*Tax revenue will stabilise at about 25% of GDP

Additions to spending plans over the next 3 years

*R9,5bn for the economic competitiveness and support package, including R2,3bn for dedicated special economic zones

*R6,2bn for job creation

*R3bn for equalisation of subsidies to no-fee schools and expansion of access to grade R

*R1bn for national health insurance pilot projects

*R1,4bn for early childhood development

*R4bn for passenger rail coaches

*R1bn for rail signalling and depot infrastructure

*R4,7bn for solar water geysers

*R1,8bn for municipal water infrastructure

*R3,9bn for upgrading informal settlements

*Education, health and social assistance will remain the largest categories of expenditure, sustaining and expanding the social wage over the medium-term period.

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Finweek budget coverage is today sponsored by Liberty Corporate.

That’s why his deficit targets should go down a treat with the agencies and the markets, as they are noticeably lower than those announced in the mini-Budget in October. He aims to reach the benchmark deficit level of 3% of GDP in 2014/15.

Revenue in the 2011/12 fiscal year is performing significantly better than anticipated in October, with an overrun of R10bn expected from the levels projected at the time. This will bring the deficit down from the 5,5% of GDP estimated in October to 4,8% of GDP.

Good shape

During the 2012/13 fiscal year, Gordhan aims to bring down the deficit further to 4,6% of GDP. This will fall to 4% and 3% in the following two years. Compared to deficits of 10% of GDP and more that prevailed in crisis-hit economies as well as in the US, which is also beset with fiscal problems, SA appears to be in good shape.

Gordhan said: “A sustainable fiscal framework, based on the principles of counter-cyclicality, debt sustainability and intergenerational equity underpins our growth strategy. We can be proud of the collective wisdom and will of our government in making the tough decisions that have kept our fiscus on a sustainable track.”

The Budget Review says that, since 2009, government has been running a sizeable current deficit – meaning that the state has been borrowing to finance spending on recurrent costs such as compensation of employees and goods and services. Borrowing to finance recurrent spending creates debt obligations that must be paid by future taxpayers who do not share in the benefits of this spending. In contrast, debt incurred to build infrastructure creates durable economic and social benefits.

The largest component

The Review says that over the next three years, government has prioritised closing the current balance (deficit). The gap should close in 2014/15, with the result that new borrowing is expected to finance investment rather than consumption. Most of the improvement in the current balance needs to come from moderation in the growth of the public sector wage bill. This is the largest component of current expenditure and has grown considerably over the past 10 years.

The Review says strong growth in compensation of employees is the result of expanded staffing in priority areas such as health care and policing; real wage increases for specific categories of professionals; improved benefits such as the Government Employees’ Medical Scheme; and several years of across the board salary increases above the inflation rate.

The Review says that while many of these improvements were necessary, compensation of employees grew from 35,7% of non-interest spending in 2008/09 to 38,7% in 2011/12. This has resulted in fewer resources available for social and economic infrastructure, and other priorities. The shift in the composition of expenditure by the outer year of the three-year framework will enable government to begin redirecting spending towards growth and job creation.

A stabilising move

On fiscal sustainability, the Review says stable or declining debt stock as a percentage of GDP is a basic indicator of sustainability. Debt grows as a share of GDP when non-interest spending exceeds revenue (a primary deficit) and rising debt service costs inevitably follow. The large primary deficits since 2009 have resulted in a considerable build-up of public debt.

By 2014/15, government will have added more than R1trn to its stock of debt since 2008.

The Review says that over the next 3 years, growth in the economy will outpace growth in non-interest expenditure, allowing debt to stabilise at about 38,5% of GDP. Debt service costs are expected to peak at 2,8% of GDP in 2013/14, declining moderately to 2,7% in 2014/15.

The benefits of these trends will become apparent over the long term as declining debt service costs allow a greater share of resources to be allocated for productive investment and social priorities.

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Finweek budget coverage is today sponsored by Liberty Corporate.

Gross domestic product growth is expected to slow from 3,1% in 2011 to 2,7% in 2012. In October, the Minister had expected 3,4% growth for 2012. As the world economy strengthens GDP growth is expected to accelerate to 3,6% in 2013 (previously 4,1%) and 4,2% in 2014 (previously 4,3%). Gordhan now expects inflation to average 6,2% in 2012 and 5,3% in 2013. The higher inflation rate reflects high food prices, rising administered prices and higher prices of imported goods due to the weaker rand.

The expectation of an acceleration in growth is based on recovery in the global economy, stronger domestic consumption as job creation improves, as well as public and private capital expenditure. Growth in private fixed capital formation is projected to rise from 4% in 2012 to 6,8% in 2014, underpinned by improving business confidence. Public investment growth will average 4,3% per year over the next 3 years.

The Budget Review says while export growth will accelerate over the medium term, imports are projected to grow more quickly in response to robust domestic demand. This will contribute to the current account deficit widening from an estimated 3,3% of GDP in 2011 to 4,4% of GDP in 2014. The level of the current account deficit should be comfortably financed through a combination of foreign direct investment, international investment in the bond and equity markets, long-term foreign loans to public entities and trade finance.

Turning to the rand, the Review says in the year ahead, the currency will remain subject to swings in global risk appetite as investors choose between low-yield safe haven assets such as US government bonds and higher yield investments in emerging markets.

Globally, the International Monetary Fund expects growth to decelerate from an estimated 3,8% in 2011 to 3,3% in 2012, down from the previous forecast of 4%. Emerging markets are expected to remain the primary sources of economic expansion, though growth will be slower than in recent years. Advanced economies are projected to grow by only 1,2% in 2012. In many developed countries, the process of reducing debt in the public and private sectors will be a considerable drain on growth in the decade ahead. Growth prospects have also declined as a result of rising structural unemployment and lower investment.

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Finweek budget coverage is today sponsored by Liberty Corporate.

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There’s not much that needs fixing at Ogilvy after the Nunu Ntgshingila era (she’s now chair), but the challenges are bigger than ever.

The easy-going days of starting an ad agency with “two CDs and a suit” are gone, says Mokgwatsane. “Clients are now looking for the twin peaks of excellence, a package delivering business success and world-class creative excellence.  You have to do both.  It means we have to be the best at Apex and the Loeries.”

Entrepreneurial spirit

To be a “modern agency”, you have to take what you have and make it more valuable. “The only way to get this kind of progress is through entrepreneurship. It affects the kind of people we hire. The big don’t always eat the small. But the fast will always eat the slow.” This is the legacy Mokgwatsane hopes to leave at the agency.

His success at VWV has proved a model for black empowerment, retaining existing skills and blending them with the “intelligent naïveté” of the new management. In 2005, after a fast-tracked career in brand management at SAB , he and two partners,  Wanda Shuenyane and Jameson Hlongwane, bought control of VWV, the country’s pre-eminent events company.

This proved a new lease of life for VWV, kick-started by its success in mounting the 2010 World Cup opening and closing ceremonies, earning awards and worldwide approbation. “The World Cup put us on the global stage. It allowed the agency to deliver an African story to the world. You don’t get that opportunity again. More than 50% of our work now is outside SA.”

Helping society along

Starting his working life as a petrol attendant, Mokgwatsane discovered VWV when he was cast for a role in a video.

As a brand experience company, VWV has tapped into the requirements of modern marketing. After five years of double-digit growth, it’s well positioned for communication in a media-agnostic world.

Integration is at the heart of a modern ad agency, says Mokgwatsane, and Ogilvy has invested across the marketing services range to drive consumer engagement.  “Ogilvy is the ad industry’s North Star, showing the way forward.  It’s our responsibility to show where the future is and help society get there.

Advertising is no longer about breakthrough campaigns.”

Beyond the gates of the comforting Ogilvy “campus”, there’s no shortage of challenges.

“Mobile Internet is a massive opportunity that has caught the industry napping,” says Mokgwatsane. “It’s the fourth screen. It’s the way consumers access the internet.  Government, too, has been caught unawares, failing to digitise the country.”

There’s huge fragmentation of service providers. A typical brand will have five to 10 marketing communications suppliers. “We have to manage that complexity and ensure that our services are best of breed. We want to lead in the use of social.” Mokgwatsane, whose “favourite campaign of all time” was the Obama election campaign, is concerned that the SA industry is falling behind.

“We need to become more entrepreneurial. Companies that are mere children in human years are changing the world. As an industry we’ve not been receptive to new ideas. We’ve not embraced technology for the benefit of clients. We’re not fast enough. We’ve taken our foot off the gas.”

An American investment banker was at the pier of a small coastal Greek village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna.

The American complimented the Greek on the quality of his fish and asked, “How long does it take to catch them?” The Greek replied: “Only a little while.” The American then asked why didn’t he stay out longer and catch more fish. The Greek said he had enough to support his family’s immediate needs. The American then asked, “But what do you do with the rest of your time?” The Greek fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play cards with my friends, I have a full and busy life.”

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat with the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution.

“You would need to leave this small coastal fishing village and move to Athens, then London and eventually New York where you will run your expanding enterprise.” The Greek fisherman asked, “But, how long will this all take?” To which the American replied: “15-25 years.”

“But what then?” The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.” “Millions … Then what?” The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play cards with your friends.”

This isn’t the first time that I have seen the analogy of a fisherman used to explain what is considered to be the appropriate and correct usage of capital. Each story focuses on the allocation of resources and in each story the resource is time but what if the focus was shifted to the fish? Now this particular fisherman is lucky, he already lives the retirement lifestyle but not everyone is as fortunate and life isn’t constant. Things change, it seems even Greek fishermen will soon find themselves working harder for less as the austerity measures passed by government truly start to affect the man on the street, or in this instance the man in the boat.

So what if the fisherman had done what the American banker suggested and spent more time fishing but instead of selling the fish, he froze them. He doesn’t have to go the whole hog and list a company from New York, not everyone is cut out for that lifestyle but everyone can save.

Yes, I harp on about this every week but this is what it all boils down to, having enough fish for your family when times get tough. For as little as R100 you can open the likes of an FNB Simply Save account. Simple saving, it doesn’t have to be fancy, but it does have to be done.

According to various industry insiders, some life assurance agents who previously worked for banks and life assurance companies have been paid millions to switch allegiance to a new employer who is on a drive to get more clients. When I hear about the amounts being paid to these agents, I become increasingly concerned that this money will need to be recovered by the new employer from their new clients in the very near future. Although I am no life assurance expert, I can’t see how the money will be recovered unless it comes from clients being sold new policies.

Loyalty

This is where the problems start. If you were sold a life assurance policy by Joe Agent from Piggy Bank three years ago and he now works for Fantastic Insurance Company, is it in your best interest to change your policy simply because he has changed employers?

The industry pays life assurance agents their commission over a two-year period. So if you cancel a policy within the first two years, it’s likely that your agent will need to repay some commission to the company. Therefore your agent will (almost never) recommend a change to a policy that he sold to you within the last two years.

But if he recommends a new policy shortly after the end of the two-year period, you need to be very wary. Life assurance products don’t change radically, so it’s likely that a policy that’s three years old is probably still appropriate for you now.

Furthermore, I don’t like complex financial products.

Perhaps I have a limited intellect, but I can never really understand how much a product really costs me when a bunch of different financial services are wrapped into one product or investment. Some combinations of products make sense but not to the extent that we see now.

Cynical slant

For instance, if I go shopping at my least-favourite retailer and go to gym 700 times a year; will my life assurance premiums drop by 17% of my last restaurant bill? In addition, if my wife goes for some extra medical check-ups, will my investments grow even faster? How wonderful! I can’t understand why this has never been done before… or has it?

Whenever I have seen the life assurance industry wrap a range of products (e.g. investments + life cover) into one – the client (me) has not really benefitted. A cynic might argue that the real purpose of wrapping services into a complex product is to hide the heavy costs that consumers will now be paying while they’re shopping at their second-favourite retailer, gymming 700 times a year and flying to Timbuktoo on their specially priced flight.

Personally, I only pay for my insurance when I can see exactly what it will cost me and I can compare the price to another company’s costing. In addition, I like to bank, fly and eat exactly where I want, not where my life assurance company tells me to. So, Mr Joe Agent who just got paid R5m to join Fantastic Insurance, that means that I won’t be buying a new life policy from you now, or ever again. But I hope you enjoy your fancy new car that I saw you driving on the weekend.

Warren Ingram is executive director at Galileo Capital and was named the FPI Financial Planner of the Year in 2011.

The recent introduction of the “conflicts of interest” legislation is a case in point. It’s aimed at eradicating the outrageous incentives that many of the financial services companies were offering to advisers selling their products. These incentives often included things like lavish overseas incentive trips (in the guise of a “conference”), dinners and entertainment at local sporting and arts events. And while commission has always been regulated, some of the companies even found ways to pay for things like secretaries and office space.

The legislation has now put a complete stop to all this (for independent advisers at least) with companies now only being allowed to spend a maximum of R1 000 per adviser per year on things like entertainment. While I’m in favour of the legislation (in principle) I think that there are far easier ways to go about regulating what companies spend on advisers than the rather excessive record keeping requirements that are currently required.

It would have been far easier for companies to be required to keep and publish (online) a record of all they spend on each adviser. When a client consults with an adviser and suspects that the advice might be “tainted” because of incentives that have been offered or paid, all that he or she would need to do would be to visit the online register of that company to establish exactly what the company has spent on that adviser to establish just how independent his or her advice actually is.

But no, we have once again followed international so-called “best practice” and now we sit with these ridiculous registers and have also destroyed a big section of the hospitality/team-building industry in the process (it’s illegal for a company to pay for conferences or similar events). Why can’t we lead for a change?

The act requires me to declare something along the following lines to my clients:

I have no conflict of interest with regard to any financial interest; any ownership interests, or any relationship with a third party that might, in rendering a financial service to a client, influence the objective performance of my obligations to my clients; or prevent me from providing an unbiased and fair financial service in the interest of my clients.

There are many examples where there are blatant conflicts of interest that aren’t covered or envisaged by the legislation. For example, there are some companies that still offer both unit trust RAs as well as the older (traditional) life insurance RAs. It’s widely accepted that these are inferior products and yet they are still the most frequently sold. Why? Because the commission structure is much higher on them than on the unit trust RAs.

Don’t blame advisers for this, they didn’t create these products – the FSB set the commission limits and it’s the companies that developed and still offer the (inferior) RAs. Surely that’s a blatant conflict of interest? And yet, it’s not addressed by legislation.

Or consider the following:

Many companies require minimum volumes of business before they’ll grant contracts to advisers. They force advisers to commit to writing a certain amount of business each year or else they face the threat of their contracts being cancelled by the company. Or worse still – our company has more than R130m worth of investments with one of the Linked Investment Service Providers (Lisps) and it refuses to give us a consultant to service our business.

Despite the fact that the Lisp earns around R700 000 in admin fees each year from our clients, they’re not prepared to service this – they’re only interested in new business. Because we won’t guarantee them a specified amount of new business each year, we aren’t serviced by them – we are consigned to the totally inefficient and impersonal call centre.

How can I possibly make the declaration above under these conditions?

If we never write new business again we’ll be fine – we’re in the service business and actively look after our existing clients. Yet the financial service companies all constantly need new business to survive – now that’s the biggest conflict of interest of all! And the legislation is mum on this!

Gregg Sneddon is an independent financial adviser with The Financial Coach in Cape Town.

We’re usually in the business of reviewing things that exist in objective reality over here at Finweek, but thought we’d relay what we do know about the next version of the iPad in the interests of informing your buying decisions.

A common question we get asked is: “Should I buy an iPad now or wait?”

Before we get into the details and answer that question, let’s make one thing clear: Apple does not pre-announce products nor does it comment on speculation – so you can’t take anything regarding the next iPad too seriously yet. It might be an entirely new version called the iPad 3, or something like an iPad 2S. It should come in March, but it might come later. Or not at all. You just never know with Apple, but we can make educated guesses.

First, it seems that March will indeed bring an announcement on the iPad front. Many reports have claimed that the announcement will be made on 7 March, to be precise. These predictions are usually based on bits and pieces of information, such as whether or not Apple has booked a venue for the launch event or made any big orders for components from its suppliers. Based on that sort of info, it seems that the 7 March prediction is a good one.

Carrier profiles to be included in version 5.1 of the iOS operating system of the iPad show a new device to be listed around 9 March. This is quite probably the iPad 3.

It also seems likely that Apple will update the screen of the iPad 3 with the Retina Display technology that makes its iPhone 4 and 4S displays so beautifully crisp. Analysts are also expecting better cameras and a faster quad-core processor from Apple – the A6 – that seriously beefs up the power of the device making it capable of running powerful applications that previously could only run on desktop or laptop computers.

Some suspected leaks of what the iPad 3 casing looks like also suggest more space for batteries. This could mean better battery life, but more likely just makes it possible to power that hungry A6 processor without compromising on existing standards.

Those are the only rumours we have any reason to believe right now, but it does mean one thing – if you’re thinking of buying an iPad now, wait for a couple of weeks. By mid-March we’ll know exactly what’s happening and then you can make an informed decision. The only reason to buy an iPad now is if you find an unbeatable offer.