Thought Leadership: Client Protection – Informed Stakeholders Lead to Informed Growth Decisions

Written by: Johan Muller – Team Leader – Energy and Power System - South Africa

Introduction

South Africa is currently undergoing various changes in the policy landscape. Broadly speaking, these changes cut across nearly all spheres of commercial activity, and will ultimately affect an extremely wide range of stakeholders. Policy changes and the economic and social effects thereof can be inherently positive or negative, depending on the ideological glasses used to gauge the impact of the policies. This article briefly investigates the link between the underlying motives (positive and negative) behind policy change, and what stakeholders can do to protect their corporate interests, whether in an individual capacity or on a company basis.

The two prima facie opposing South African examples that will be discussed include the Protection of Personal Information Bill and the tabled Carbon Tax Paper.

Protection of Personal Information Bill

The Protection of Personal Information Bill (PPIB) aims to promote the protection of personal information processed by public and private bodies, as well as introducing principles to establish minimum requirements for information processing. Furthermore, the PPIB will guide the establishment of an Information Protection Regulator coupled with installing codes of conduct. It will also guide the establishment of rights of persons regarding unsolicited electronic communications and automated decision making and so forth.

The reasons for the existence of the PPIB are noble and justifiable. The general South African public has long been a victim of questionable business practices, linked to the incorrect collection and storage of personal information by corporates. This has led to cases of identity theft, and the receiving of unsolicited marketing materials. Also the PPIB is an attempt to bring South Africa’s privacy laws in line with international standards, such as those found in the European Union countries.

With the rationale behind the PPIB, the next question arises, namely: how should companies go about the implementation of the PPIB and how implementation will affect stakeholders - also from a cost perspective?

With the PPIB still being in Bill phase (but set for promulgation soon), companies are afforded the opportunity to gain a complete understanding of the potential effects the PPIB will have on them. There will not be a single-solution answer, since companies are completely diverse in nature when it comes to operations. Companies have the chance of obtaining sound advice from independent advisors (consultants, audit houses, law firms) to ensure that they hit the ground running when the PPIB

becomes operational. This kind of strategic foresight is invaluable, and will almost surely benefit first-movers.

Factors that will aid in a smooth transition include:

Initial high level analyses: Depending on the size and resource capability, and availability of the company, a high level internal analysis can be launched to determine the effects of the PPIB. Based on a reading of the PPIB, Frost & Sullivan predicts that very few of the companies in South Africa will be unaffected by the PPIB.

External advice: Once an internal analysis has been done (or not done), companies will need to obtain expert external advice. The detail of advice sought will depend on the complexity of the company. A small family business distributing equipment and merely maintaining a database of client contact details will be a relatively “quick fix” compared to a large entity, such as Old Mutual, ABSA, and Toyota, or companies making use of cloud-computing for example. Expert advice will include a full business analysis of all the potential affected areas, with subsequent strategies and management initiatives, frameworks and strategies installed to activate an efficient transition.

Wording of the legislation: Clear and robust legal documentation / policy, which leads to clear and robust implementation strategies

Availability of advisors: The availability of informed and experienced advisors, who not only understand the effects of the PPIB, but are also able to analyse the effect the PPIB will have on the operations of the company.

All things being equal, Frost & Sullivan does not foresee companies struggling too much with the implementation challenges accompanying the PPIB. The challenges that exist can all be addressed by the company and a great deal of issues will be solved by pro-active companies enforcing a pro-active office culture where behavioural changes are embraced. Effectively, the ball is in the court of industry.

Carbon Tax

In stark contrast with the PPIB above, is the proposed Carbon Tax concept tabled in 2010 in South Africa by the Department of Treasury. The main purpose of this tax is the eventual reduction of harmful greenhouse gas emissions, although nearly two-thirds of emissions will be tax-exempt until 2020 to lessen the impact on industry. In its 2012/13 budget, the Department of Treasury proposed a 60% tax-free threshold on annual emissions for all sectors, including electricity, petroleum, iron, steel and aluminium. Furthermore, all entities except for electricity (Eskom) would be able to claim additional relief of at least 10%.

The above is the result of various discussions and input from industry, after the initial carbon tax document was tabled in 2010, which led to major concerns being voiced by industry as to the reach and effects of the tax. Several of the industries stated that

they would either pass the full brunt of the levy onto the consumer, or move their operations to countries where no carbon tax exists.

The reasons behind the existence of the carbon tax are questionable. On the one hand, the reasons are green-friendly and completely justifiable. South Africa is a major emitter of CO2 gasses stemming from the usage of coal to fire power plants. In fact, South Africa is by far the leading emitter of greenhouse gasses on the continent, and the carbon tax could be seen as a pioneering move of example-setting in the developing world.

On the other hand, various comments have been made by industry as to the motivation behind the carbon tax. Some say that the carbon tax was merely tabled to place South Africa in a favourable light at the recent COP17 talks. Competitive issues were raised, asking whether the South African industry will survive a carbon tax. This is based on base factors as to why corporates choose South Africa as an investment destination, such as lower operating costs.

Furthermore, South Africa is all but alone from a comparative developing nation perspective in the carbon tax landscape. The majority of other countries with some form of a carbon tax are developed countries such as European countries. The South African energy mix, however, does not currently afford industry to use alternatives to coal fired energy, with renewable energy being in the starting-blocks phase.

Factors that will aid in a smooth transition include:

Understanding the tax: Industry gaining insight into the reach and scope of the eventual final Bill, once it is tabled. Currently, the objectives are more clear than two years ago, but still in a process of being finalised. Thus, the industry is placed in a positive position where they can influence the outcomes of the final legislation. This also affords Industry the necessary time to get its house in order.

Getting Industry on-board: In order for Industry to buy into the idea of the carbon tax, the commercial side of the tax needs to make sense to Industry. This will be the result of various informed stakeholder input sessions, as well as clear “earmarking” of the revenues from the tax.

Existence of alternatives: In order to adhere to principles of fairness, industry should be taxed in order to drive a changed behaviour. If no alternative exists, the tax merely becomes a stick beating a revenue drum.

Implementation strategies: Once the wording and objectives of the tax become more final, industry can continue to increase the activities of making sure their operations comply with the requirements of the tax. This will include making use of internal and external advisors and consultants. Several of the larger companies potentially being affected by the tax, have already begun to

make strategic provisions (financial and operational) in preparation for the pending tax.

Frost & Sullivan predicts fewer challenges than originally anticipated in 2010/2011. This is due to the objectives of the tax becoming more refined, coupled with Industry concerns filtering through to the legislator. This tax could potentially have massive implications on Industry from a competitive perspective and it, therefore, becomes imperative for Industry to stay abreast of new developments. South Africa has the benefit of learning from countries such as Australia, which is also coal intensive and recently (July 2012) had a carbon tax implemented. The implementation of carbon tax in Australia was considered a political rag-doll, being pulled back-and-forth. South Africa should indeed learn from the justifications used, such as “the cost of not acting”. From a macro perspective, the question lies in where the money will go: to the South African government or tax payers, or to overseas jurisdictions in the form of penalty payments as levied by the European Union.

Independent Informed Advisors

One of the key take-aways from both the PPIB and the Carbon Tax documents is the importance of the role of informed advisors. Advisors could be found in various forms (with different objectives): non-professional or semi-professional advisors, such as interested members of the public, academia and the media, and professional advisors. For example: consultants, law firms, auditing houses and engineering firms. The role of the advisor is crucial: effectively being responsible for those areas where the company does not have capacity, insight or competency to identify or address challenges.

The general public, by way of interested individuals, academia and the media, will provide the first layer of information which the company can act on. The professional advisors should be able to add an additional layer of knowledge, by evaluating the current status quo. If the policy is finalised, then the advisors can provide implementation strategies. However, if the policy is still in draft phase, then the advisors can recommend amendments or alternatives, using the company as a conduit to effect changes in the policy – in the best interests of both the company and the country. Raising the overall level of information and ethics should, in theory, raise the level of responsibility towards accountable and responsible outcomes.

Conclusion and Recommendation

Policy is supposed to be driven by economic and social objectives in the interest of the country. Too often, however, policy is fuelled by short-term political and commercial objectives where voting power and financial returns are the main motivators.

Generally speaking, with the level of dissemination of information in South Africa currently increasing (due in part to the rise of internet users having access to media

and more importantly, the rise of education levels), the result is that the average knowledge base is growing wider and deeper. South Africa is in need of informed advisors, pushing-back on policy that is not in line with positive long term growth strategies. The other side of the coin is that informed advisors will drive positive policy with enthusiasm, rather than be apathetic about it. Granted, both the carbon tax and the PPIB are more than likely driven by International influences, with the European Union throwing around its weight to enforce international compliance with their own policies, by levying penalties. However, it is still up to the local players to determine, to a very large extent, the detailed content of the policy going forward.

Companies should be aware of all policy changes affecting not only them, but also those in the broader commercial playing field they are active in. And subsequently, when policies are being developed, that stand to affect their company, it is crucial to obtain the guidance and insight of trusted advisors to ensure that market share and growth targets are maintained in the long run. Playing the “wait and see” game could result in massive penalties, with (for example) indications that the same penalty system as found in the South African Competition Commission could be introduced in the case of non-compliance with the PPIB.

Contact:Samantha JamesCorporate Communications – AfricaP: +27 21 680 3574F: +27 21 680 3296E: samantha.james@frost.com

http://www.frost.com