Erasibo Consulting

Here’s whats being said on twitter about South African media freedom and the ANC’s  moves to “deter” the media.
http://search.twitter.com/search.atom?q=%23zamediafreedom

Please don’t let them take me to Mpumalanga.

There is mounting evidence that political pressure lay behind the arrest this week of Sunday Times journalist Mzilikazi wa Africa, despite furious denials from police top brass.

Whether you are considering buying a business for a few thousand rand or for a few million rand or whether you are considering starting up a business, a due diligence exercise will prove most useful in providing you with a degree of peace of mind prior to putting pen to paper on the business agreement.

I want to stress that regardless of the size of the deal and regardless of who the parties to the deal are, make sure you undertake a due diligence. I will always advocate for the most thorough due diligence you can afford, this is money, time and effort you should spend in order to save you money, time and effort later. Also remember, you often get the value of service you pay for, so don’t cut corners.

In researching this article I have been staggered to see how little information is readily available on public platforms on the subject of due diligence. What is available is very pricey and usually only talks to high level issues. This is worrying considering how vital a due diligence exercise is, especially to the first time business owner.

What is Due Diligence?

For the purposes of this article, Due Diligence should be understood as an exercise to be undertaken as part of the purchase of a new business. Simply put, due diligence is an investigation into a business with the purpose of proving to the initiator of the due diligence (typically the buyer) whether the facts offered up by the other party to the deal (typically the seller) are in fact a true reflection of the business.

Who should do the Due Diligence?

In order to do a due diligence well you will need two key role players:

1. Professional Assistance: Due Diligence’s exercises are technical in nature and if you have the funds available make use of a professional firm that has done these types of exercises before. Apart from all the certificates and client references that you will get from the firm you hire, check to see if any of the people who will work on your due diligence have ever run businesses before – you cannot under estimate the value of experience.
2. You: Your personal involvement in the due diligence process is vital. The professionals you bring on board work for you, but will not always understand, amongst other issues, precisely what your vision is for the business, what your appetite is for risk is and how you would deal with problems that will be encountered.

I would encourage a more hands on, engagement with your team so that at the end of the day you are getting a due diligence report that will allow you to take an effective decision. You don’t just want a report that says, “Yes do it” or “No don’t do it”. A due diligence is not simply a synopsis on the business you want to acquire or startup. In fact your due diligence report (which will be a detailed report on all aspects of the investigation) can serve as a great tool for guiding your future business plans and strategies for the business should you acquire it.
Some finance houses and banks will offer to do a due diligence for you. Be wary of this service; be wary of any due diligence exercise where the companies doing the exercise for you will profit from your deal outside of the fee you pay for the due diligence.

A Due Diligence Model

Non-Disclosure Agreement

The due diligence exercises should always start with a Non Disclosure Agreement (NDA). Characteristics of the NDA that you should be aware of are:

• The NDA is to be signed between yourself and the seller.
• This agreement essentially protects both parties from the having their confidential business information made public.
• A confidentiality period must be specified. Please remember that the confidentially clause does not apply to illegal activity.
• The NDA should talk to you requiring a Due Diligence and it should specify the high level areas that the Due Diligence will cover. The seller must agree to this. If the seller does not agree to this, walk away.

Due Diligence Areas

A good due diligence exercise will cover the following nine areas1. In addition you (or your team) will need to acquire from the seller the following documents for your due diligence exercise. These documents should be made available to you quickly as the seller should already have these available. If the seller is unable or unwilling to provide this information this would be a cause for serious concern. The fundamentals of running a good business are record keeping.

: *please note the Due Diligence Item column is not exhaustive*

Due diligence is your safety belt, often you only realize that you need it, when the deal has gone sour and your business is in crisis. Do not make that mistake and overlook this process.

In June 2009 the Minister of Local Government made this hard hitting statement:

“…I am taking the liberty of sharing this experience with this assembly to argue that if the North West is indicative, in any way, of what is happening in our municipalities in the other eight provinces then we need to declare a national state of emergency on local government in this country…This is a sector that is perceived to be incompetent, disorganised and riddled with corruption and maladministration….During several research surveys conducted regarding public perception on spheres of government, local government has always scored the lowest…..Even the latest research results points to that sad perception. For that matter, the results show that the public rating of municipalities is at an all-time low…”
Minister Sicelo Shiceka – SALGA NMA – 10 June 2009, East London

Apart from heavy hitting speeches there has been action, I thought I’d note one set of investigations that has already taken place:

Investigators submit preliminary report on Mkhondo municipality

3 September 2009

The team of investigators appointed by the Mpumalanga provincial government, in terms of section 106(1)(b) of the Local Government Municipal Systems Act, 2000 (act No.32 of 2000), to investigate allegations of maladministration, fraud, corruption, nepotism, poor service delivery, poor implementation of the Integrated Development Plan (IDP) and lack of proper consultation in terms of resource distribution and infrastructure made against the Mkhondo local municipality has submitted its preliminary report to the provincial government.

The report has indicated the following findings:
On financial mismanagement, the investigation report has revealed that there has been mismanagement of moneys allocated for projects. There have also been municipal officials found to have been paid unduly. Such moneys must be recouped and implicated officials should face disciplinary hearing. Some officials and councillors have been found to have misused municipal credit cards. The use of credit cards has been discontinued by the Administrator. There was no policy to deal with credit cards.

The administrator will immediately set up a policy on use of council credit cards. Disciplinary hearings will be held against the implicated officials. In most municipalities the use of credit cards has been long stopped.

Fleet management

The preliminary report has also indicated that there was a lack of proper monitoring and accountability on municipal vehicles, which led to the misuse of government fleet and wastage of fuel. The administrator has started putting systems in place to minimise the abuse of council resources.

With regards to employment of personnel, the findings have indicated that there have been cases where individuals were employed illegally in breach of the employment procedures. These dubious appointments will be probed further and individuals found to have been wrongfully employed will be dealt with severely.

The municipality has started designing new policies and systems that will ensure that all employees and employees of the municipality are appointed in a transparent manner based on their skills and competencies. Nepotism is a punishable offence. Disciplinary action will commence immediately against all implicated individuals.

The administrator will be given four months to conclude all outstanding matters on the investigations, and MEC Norman Mokoena will oversee the process. The provincial government would like to thank the community for cooperating with the administrator and his team during the period the municipality has been put under administration.

Enquiries:
Mabutho Sithole
Cell: 082 398 3348

Simphiwe Kunene
Cell: 082 413 3931

Vusi Mashabane
Cell: 076 762 6510

Issued by: Office of the Premier, Mpumalanga Provincial Government
3 September 2009
Source: Mpumalanga Provincial Government (http://www.mpumalanga.gov.za/)

We need to start seeing municipal officials being fired or prosecuted, we need to see councillors held directly accountable. There is a lot of talk about this taking place, lets see it happen. Its the only way to get those in power at the municipal level to take their mandates more seriously.

A recent Mail & Guardian investigation claims that almost half of all Director Generals in government have private business interests.

There is no law that prohibits them or any other government officials from having active private business interests. However let us reflect on the following:

• The recent election if anything has highlighted how the quality and pace of service delivery is not meeting citizens expectations. This begs the question, can those charged with driving transformation (and who are remunerated handsomely) afford the time to reflect on anything other than the mandates embedded in their job descriptions?
• Fraud and Corruption is eating away at our democratic state, it takes state resources away from those who need it the most and it creates a disharmonious environment in which communities are angered.
• The departments under the stewardship of these officials are not the best running organisations. Qualified Auditors General reports, failed project implementations, chronic underspending, maverick spending and disjointed policy implementations are just some of the aliments these officials have not cured in their departments, but we must trust they can manage both their private business interests and these complicated institutions of state in their stride?

On a promising note the new government does appear to moving on removing senior officials who are not operating as they should. In recent months Director Generals Njabulo Nduli (Forestry and Fisheries), Director General Pam Yako (Water Affairs) who apparently heavily escalated an IT project budget to Arivia,Kom and arts and culture’s acting deputy director-general Tale Motsepe.

Below is a press release from the Public Service Commission on this very issue dated 16th July 2009, the release is damning.

On the Public Service Commission Report: “Overview of the Implementation of the Financial Disclosure Framework: Financial Year 2007/2008”.
16 July 2009

A.  BACKGROUND

The predominant mode of service delivery in the public service is through private sector service providers and while at law nothing prohibits public officials from having private interests, the PSC, in order to minimize the risk of corruption developed a Financial Disclosure Framework which was made mandatory for all Senior Managers to abide by. This Framework requires all members of the Senior Management Service (SMS) in the Public Service to disclose all their registerable interests annually to their Executive Authorities, i.e., Ministers and MECs. The political heads of departments are in turn required to ensure the submission of the financial disclosure forms to the PSC exactly a month after the beginning of each financial year, i.e., by 31 May of each year.

However, since 1999/2000 when the Financial Disclosure Framework was introduced, compliance with it by many members of the SMS in the public service has been far from satisfactory. This in essence means that every financial year many senior managers fail to disclose their financial interests. Because of the mode of service delivery predominantly used by the public service, involving the outsourcing of the functions of the state with vast amounts of taxpayers’ money spent on this, the risk posed by this lack of commitment to a key instrument for inculcating financial probity and combating corruption cannot be overstated.

For example, for the first financial year (1999/2000) the PSC received 61% of disclosures. For the last three financial years i.e. 2004/2005, 2005/2006 and 2006/2007 there was a steady increase in the submission of the financial disclosure forms with a submission rate of 77%, 80% and 87% respectively. However, this improvement in the compliance rates has only been achieved after the due date. The inability to reach the 100% mark remains a serious indictment on the SMS members in the Public Service, and their Executive Authorities, because failure by even one public official can result in significant losses of taxpayers’ money channeled corruptly to private enrichment

As well as being responsible for the custody of the Financial Disclosure forms, the PSC now scrutinizes and verifies the information contained in these forms and periodically overviews the entire Framework to see if it is working as it was intended to. Key findings of the Scrutiny and Verification of a sample of forms for the Financial Year 2007/2008 and an Overview of the Framework as contained in the Report by the PSC show disturbing trends.

B.  KEY FINDINGS OF THE OVERVIEW OF THE IMPLEMENTATION OF THE FINANCIAL DISCLOSURE FRAMEWORK: FINANCIAL YEAR 2007/2008

1. Continued lack of commitment to instrument as indicated by persistent non compliance: The mandatory cut-off date for submission of the disclosure forms to the PSC is 31 May of each year. However for 2007/2008, the PSC only received 48% of the disclosure forms by the prescribed date. For the financial year 2006/2007 only 10% of disclosure forms were received by the due date. This breaks down as follows between the national and provincials departments:
   1. Only 38% of the forms of national departments and 59% of the forms of provincial departments were received by the PSC by the due date of 31 May, meaning that 2791 SMS members at national level and 1663 of the SMS members in the provinces did not submit their disclosure forms by the due date
   2. Of the thirty-seven (37) national departments, twenty (20) submitted their disclosure forms by the due date. Although this is a significant increase from the previous financial year (2006/2007) when the forms of only eight (8) national departments were received by the due date, of key concern to the PSC is that the departments which exhibit laggardly compliance by the nature of their service delivery mandates are those involved in big programmes and therefore having to issue massive tenders. The North West Province with 90% is comparatively the best performing province in terms of submitting the disclosure forms of their SMS members by the due date. The Free State with 29% is the worst performing province. The low level of compliance by the due date especially by the Free State and Gauteng (47%) raised serious concerns about their commitment, transparency and accountability.
   3. As at December 2008, 3188 disclosure forms (74%) of designated officials of national departments were lodged with the PSC.
   4. Only three national departments namely, the Departments of Arts and Culture, Correctional Service and Land Affairs had not by the end of December 2008 submitted any disclosure forms.
   5. Thus for 2008 only Six (6) national departments managed to submit all the disclosure forms of their SMS members by 31 May 2008 with an additional ten (10) national departments managing to submit all disclosure forms by 31 December 2008. A key concern for the PSC with the late conclusion and submissions of disclosure forms is that with the officials concerned there is no way of determining the risk of potential or actual conflict of interests and managing this in the intervening period between the prescribed deadline and when they eventually sign and submit their forms to the PSC.
   6. For the provincial departments, the overall submission rate as at 31 December 2008 was 89% which is significantly better than that of national departments which stood at 74%. Because the provincial level of government is responsible for the actual delivery of basic services, the interaction between the public and private sectors does tend to be more intense and with it potential conflicts of interests are more likely to occur. Given the risks associated with the interaction between the public and private sectors in terms of bribery and collusion, it is important that potential conflicts of interest be identified and addressed before actual conflicts of interest occur. The compliance rate at provincial level is therefore a cause for concern.
   • The North West (100%) and the Northern Cape (100%) are the two best performing provinces.
   • KwaZulu-Natal performed the worst (76%).
2. Unsatisfactory Disclosure by Directors-General and Deputy Directors-General:
   1. As at 31 December 2008 there were 105 officials designated as Directors-General at provincial and national departments of which 78 (74%) had submitted their disclosure forms.
   2. For the same period there were 419 officials designated as Deputy Directors-General at national and provincial departments of which 295 (70%) had submitted their financial disclosure forms.
   3. In terms of national departments there were 38 officials designated as Heads of Departments (HoDs) as at 31 December 2008. Only 29 submitted their financial disclosure forms to the PSC. This represents a submission rate of 79% by the HoDs.
   4. For the same period there were 236 officials at the level of Deputy Director-General attached to national departments. Of these officials, only 153 (65%) had submitted their disclosure forms to the PSC.
   5. As at 31 December 2008 there were 67 officials designated as Directors-General at provincial, level of which 49 (73%) had submitted their disclosure forms. For the same period there were 183 officials designated as Deputy Directors-General at provincial level of which 142 (78%) submitted financial disclosure forms.The low level of compliance by Directors-General and Deputy Directors-General at both national and provincial departments is of concern to the PSC. At this level better compliance is expected because these officials take the lead in decision-making within their departments. Moreover, the major government contracts are also signed at this level and therefore transparency and accountability with regard to the Financial Disclosure Framework is of utmost importance.
3. Repeat Offenders:
   1. The PSC found 249 senior managers to be repeat offenders who failed to submit their disclosure forms for two successive financial years.
   2. Only two provinces i.e. the North West and Northern Cape have no identified repeat offenders.
   3. At national level there were 179 senior managers who failed to submit their financial disclosureforms for two financial years in succession.
4. Potential or Actual Conflicts of Interest based on the assessment of the Financial Disclosures forms :A sample of thirty percent (30%) of the disclosure forms, totaling 2038 forms, received for the 2007/2008 financial year which included Limpopo, Western and Eastern Cape provincial departments was assessed for the purpose of identifying potential conflicts of interest. The PSC found as follows:
   1. 434 senior managers may have potential conflicts of interest between their private interests and their official duties. Although this represents 21% of senior managers that formed part of the sample, it is a very significant and real number.
   2. The highest number of potential conflicts of interest at provincial level was identified in the Limpopo Province at 121 officials
   3. The highest number at national level i.e., 20 was identified at the Department of Social Development.
   4. d. Of the Seven-hundred-and-sixty-nine (769) disclosure forms of ten (10) national departments scrutinized by the PSC, 151 or 19% of the sample may have a potential conflict of interest between their private interest and official responsibilities.

   That 434 out of 2038 senior managers (21%) who formed part of the sample may experience potential conflicts of interest if extrapolated to the entire SMS could mean that over 1700 managers in the Public Service (20%) could be experiencing potential conflicts of interest. This again underscores the importance of the Financial Disclosures Framework and the need for Executive Authorities to use the information provided through the financial disclosures to manage potential conflicts of interest and the risks associated therewith.

5. Potential Conflicts of Interest According to Category:
   1. Of the sample scrutinized, 341 Senior Managers have interests in private companies whose core businesses are closely related to the core mandates of their departments.
   2. Another 51 senior managers have directorships or shares in multiple companies raising concerns about the extent to which these officials can devote their full time and attention to the Public Service.
   3. The PSC could not conclusively identify whether a potential conflict of interest exists in respect of 32 of the senior managers that formed part of the sample due to the fact that insufficient information was available on the financial disclosure forms of certain senior managers, and that not enough information concerning the company was available from the CIPRO database.
6. Non-disclosure of Directorships/Partnerships in Private Companies and Close Corporations:
   1. The PSC found that 210 SMS members in the sample did not disclose their interests in some companies or closed corporations.
   2. A total of 112 senior managers from national departments and 98 senior managers from provincial departments did not disclose their interests.
   3. At national level 11 of these senior managers are employed by the Department of Science and Technology and 10 at the Department of Agriculture.
   4. At provincial level the highest number of such senior managers are employed by the Limpopo Province (43) followed by the Eastern Cape (34). The PSC’s scrutiny of the disclosure forms found that in many cases the companies that were not disclosed by the SMS members, actually poses a potential conflict of interest.
7. Scrutiny of properties:
   1. a. 182 SMS members did not disclose their properties. The registration dates of the properties were checked a nd it was found that registration occurred well before the date on which the disclosures were due.
   2. b. A total of 54 senior managers in the Limpopo Province did not disclose all of their properties.

C. RECOMMENDATIONS:

The PSC recommends the following to improve the compliance with the Financial Disclosure Framework:

1. Executive Authorities must prioritize this issue – The PSC has on numerous occasions advised and reminded Executive Authorities of the requirement that all senior managers in their departments must comply with the Framework by submitting the financial disclosures. It appears that such reminders are not followed up by Executive Authorities in all instances and members of the SMS may easily become complacent with regard to the submission of the disclosure forms.
2. Non-Compliant SMS Members Must be charged with misconduct - Chapter 3, Section H of the public Service Regulations clearly stipulates that any designated official who fails to disclose his/her financial interests, or willfully provides incorrect or misleading details, is guilty of misconduct. The PSC recommends that Executive Authorities charge transgressing Heads of Departments with misconduct and ensure that other members of the SMS are charged with misconduct for failing to disclose an interest by instructing their Heads of Departments to do so in terms of the Disciplinary Code and Procedures, as contained in the SMS Handbook.
3. Repeat offenders should be charged with misconduct and the Executive Authorities should obtain the outstanding forms of these repeat offenders and submit them to the PSC as soon as possible.
4. Dedicated Staff to Manage the Process of the Conclusion of Financial Disclosure Forms by Senior Managers must be appointed within departments: This will ensure that the forms are submitted timely to the PSC.
5. Disclosures of private companies and close corporations – Executive Authorities should ensure that members of the SMS are made aware that they need to disclose all companies, including dormant and non-profit making companies.
6. Updating information pertaining to companies on the CIPRO website - SMS members should take personal responsibility for their resignations from companies by following up and making sure that their details are removed and the CIPRO data base is accordingly updated.
7. Departments must put in place mechanisms for management of conflicts of interest as required to by the PFMA, National Treasury Regulations and Risk Management prescripts: At provincial level, departments should consider strategies to deal with persons who have been identified, through the disclosure of their financial interests, as having a potential interest by reassigning the duties of the official if this can be effected in the interest of the state. If this is not possible, a transfer to another component should be considered. If the reassignment of duties or a transfer is not possible, consideration should be given to request the official to resign from the private interest that is causing the conflict of interest.
8. Interaction by Portfolio Committees - Given their Legislative and Parliamentary oversight role, Portfolio Committees should call departments and Executive Authorities to account where there has been non-compliance as well as low levels of compliance.

CONCLUSION

The management of potential conflicts of interest forms an integral part in the Public Service’s desire to become integrity driven. The PSC is concerned that financial disclosure forms are not submitted timeously to the PSC. The timely submission of disclosures places the PSC in a position to identify potential conflicts of interest and inform the Executive Authorities timeously. In doing so, the PSC is enabled to assist Executive Authorities and senior managers in preventing a potential conflict of interest becoming an actual conflict of interest. The PSC has, through the scrutiny of the sample of financial disclosure identified 434 managers who may have potential conflicts of interest. Of concern is that some of these senior managers have already been reported to the NACH and allegations of corruption have been leveled against the relevant individuals.

If these potential conflicts of interest had been identified proactively, Executive Authorities would have been in a position to introduce measures to ensure that there are no actual conflicts of interest. It is therefore incumbent on the Executive Authorities to introduce measures for the effective management of conflicts of interest in their respective departments. The PSC trusts that the findings and recommendations contained in this report will assist departments and Executive Authorities to improve the management of the Financial Disclosure Framework and that a greater level of compliance to the Framework will be achieved.

ISSUED BY THE PUBLIC SERVICE COMMISSION

For enquiries, please contact:

Mr Humphrey Ramafoko,
Director: Communication and Information Services
Tel: 012- 352 1196
Cell: 082 782 1730
Fax: 012- 325 8344

Or

Ms Dikeledi Phiri,
Deputy Director: External Communication
Tel: 012- 352 1070
Cell: 082 386 5743
Fax: 012- 325 8344
Website: www.psc.gov.za

This is the fourth article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our other articles which sets our tone.

Continuing on our series of articles on the franchise industry in South Africa, we want to look at the Consumer Protection act and what it’s impact is on the franchise industry?

The Consumer Protection Act is the second major development in favour of consumer protection in recent years. The first being the National credit Act which is designed to improve transparency; prohibit unfair contract terms and practices; and prohibit anti-competitive practices. The Consumer Protection Act is designed to protect consumers from exploitation and unfair practices by unscrupulous businesses, and to empower consumers to make wise purchasing decisions. Together these Acts entrench the protection of consumers as prescribed under the Constitution of the Republic of South Africa.

Rights of Consumers

Under the act, franchisees are regarded as “consumers” and franchisors as “suppliers.” Franchisees are given a number of consumer rights, including the right to equality, privacy, choice, information, disclosure, fair and responsible marketing, honest dealing, fair agreements, fair value, good quality, safety, and supplier accountability. Franchisees are also protected against undue influence or pressure; unfair tactics; and false, misleading, or deceptive representations concerning material facts. This would also apply to the contracting arrangements between franchisor and franchisee.

Franchise Agreements

Under the Act a franchise agreement is defined as an agreement where a franchisor grants to a franchisee for consideration a right to carry on business under a system or marketing plan substantially determined or controlled by the franchisor. In addition, the franchisee’s business is substantially or materially associated with advertising schemes or programs or with the trademarks of the franchisor, or any combination of these that are licensed to the franchises. The agreement must be in writing and signed by at least the franchisee. The Act allows for a cooling of period of 10 business days, wherein a franchisee may cancel a franchise agreement they have signed without incurring any cost

The right to full disclosure is entrenched in the Act. This is in recognition of the number of cases where franchisees had been devastated financially after investing their life savings into franchises that were sold to them on the premise that the franchises would be far more profitable than they ever actually would be. Under the act, franchisors will be required to disclose certain information to prospective franchisees, as provided in regulations to be promulgated by the Department of Trade and Industry.

Monopoly on the Supply of Goods

Currently, franchisees in South Africa have limited protection against unfair practices by franchisors under that country’s Competition Act, particularly in relation to the tying or bundling of unrelated products by a dominant franchisor or when it comes to exclusive dealing. Complaints stemming from these activities are, however, difficult to prove, and the franchisor in question has to be dominant or have market share.

The Act has taken the foregoing prohibitions in South Africa’s Competition Act and applied them regardless of whether the franchisor is dominant. The new law prohibits bundling or tying of products by a franchisor, unless the franchisor can show either (i) that the bundling results in economic benefits for consumers or (ii) that the convenience of bundling outweighs any restriction on consumer choice. Alternatively, the bundled goods or services must be offered separately and at individual prices.

The Act guards the right to consumer choice by generally providing that franchisors must not require, as a supply condition or as a condition of entering into an agreement, that the franchisee purchase goods or services from the franchisor or from any other designated supplier. It is a valid defense to show that products or services that the franchisee was required to purchase are reasonably related to the branded products or services that are the subject of the franchise agreement. It remains to be seen how closely linked to the brand “reasonably related” will need to be to excuse such a requirement by a franchisor. As a result, many franchisors will no longer be able to be the sole supplier of goods and services to a franchisee, unless it can be shown that the products and services are “reasonably related” to the brand.

Franchisors should take care to ensure that products and services essential to the protection of their brand are explicitly listed in their franchise agreements, to reduce any later issues regarding interpretation. In other words, the Act suggests that franchise agreements provide for core and non-core products. Core products or services would be the primary, unique products related to the brand.

With regard to transitional provisions, it appears that the Act will not apply to pre-existing franchise agreements (or transactions) entered into before the general effective date, expected to be October 2010. However it will apply to renewals of contracts. The Act highlights a number of factors relating to fair and honest dealings and unfair unreasonable and unjust contract terms. The Act allows for the cancellation of contracts, whole or part should it be deemed to have contravened these principles as detailed in the Act.

Closing

The Act will have huge implications for the franchise industry. For while it has boomed has also become a place for corrupt, fly by night operations.  The Franchise Association of South Africa has expressed concern with regard to the implication of the Act and the burden it will place on its members. This is a concerning position as the Act can only create credibility for the franchise industry by ensuring that it closes the gap for illegitimate franchisors to operate.

Surely this would be a benefit to FASA, to cleanse the industry of undesirable operators. Franchisors who lack the capacity for adequate, transparent contracting and operations shouldn’t be selling off franchises. Organisations like FASA shouldn’t be accepting these franchisors as members or providing a potential front for their operations.

This is the third article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our other articles which sets our tone.

Commercial banks are part of legitimate business. We trust them with our savings, we store our incomes in them, and we borrow money from them, all the time assuming that the transactions are legitimate and reasonable and regulated to some extent. We rely on them for every aspect of functioning of civilised life-homes, cars, business, school fees and personal events.  We also expect that they will exercise reason in their interactions with us because their survival depends on the patronage of their clients. So their responses to us are based on good credit lending praFFrctices and when banks make errors in planning, governments are hard pressed not to finance their recovery with taxpayer’s money, as in the case of the US recently. Banks are essential to the stability of our economy; citizens and the banks share a common investment in our economic future.

But have banks gotten too big for us. Do they represent something untouchable? So when they repossess homes and cars in a panic about the money that is being lost like a waterfall without following the specified due processes outlined in those contracts is this acceptable under the circumstances or is this just a case of bullying. And what really is their responsibility as the credit provider?

In responding to this question I will share with you our own insightful experience with the banking environment recently, which has been the cause of much debate within our own inner circle.

We took out a loan to finance a franchised restaurant. After the bank evaluated our application they informed us that we were not disadvantaged enough to qualify for any form of BEE preferences (the words used were “not black enough”). This opinion of the banks was nether policy nor constitutionally justifiable. However, we were in love with the business idea, so we didn’t make a scene. We put up 40% of the financing required for the franchised restaurant we wished to buy. The bank confirmed that it had done a due diligence on the restaurant and the franchisor and was extremely happy with the results and would finance the deal.

In fact the franchisor was so highly credible to the bank, that the bank offered them great deals on banking and transacting facilities for their franchisees and they offered the group an approved financing facility for all new franchise restaurant setups. Since we knew what the obligations placed on the bank were by law to thoroughly assess any new deal we felt extremely confident in all the new “benefits” the bank was offering the franchisor.

So when the figures provided to us and the bank by the franchisor turned out to be deliberately exaggerated and show that a fraud was committed by the franchisor so as to ensnare us in the business deal the issue of what exactly is the responsibility of banks in this circumstances was raised by us. The answer apparently is that the banks have no obligation. The bank completed a FICA assessment of the franchisor; their results didn’t cry out any kind of foul – it should have. There was evidence of their foul practice’s aplenty, which at the time was outside of our sphere of access.

Now that the bank is aware that there was a fraud committed by the franchisor does it discontinue giving out loans to new franchisees wishing to purchase restaurants in the same group or does it blacklist the group? No of course it does not.

Granted our matter hasn’t been to trial yet, but we can supply details (irrefutable forensic evidence) to the banks legal department and they can make a judgment about the caliber of clients they want to maintain or their obligation to new investors. If the bank continues to give out loans to unsuspecting buyers wishing to take up opportunities within the same group, would the new franchisees be able to sue the bank for facilitating a fraud since the bank has knowledge that the franchisor is suspected of fraudulent behaviour?

At the very least the bank should consider suspending any new deals pending our case going to trial and being decided on, because should we win our case the franchisor may not be able to operate anymore and new franchisees would be placed at risk of defaulting on their loans, which is a risk to the banks bottom line.

At the very minimum this franchisor has committed FICA fraud? Should the bank not have called in SARS immediately? The bank leverages their risk on personal sureties signed by borrowers – the franchisees, so whatever happens with the business, the bank will get its money one way or the other. But should they? The National Credit Act outlaws irresponsible lending and by this it means that the banks assessment of whether a borrower is suitable for credit has to do with an assessment of the borrower’s ability to pay. If the borrowers ability to pay has everything to do with the business’s capacity to generate a certain profit, and the business was in fact never able to do that as the figures provided were a fake. Is the bank not responsible for irresponsible credit provision?

I’m not suggesting that the banks share responsibility for your business decisions or mine. You go to the bank for financing not buying into your idea. But they do have a role to play in not perpetuating a fraud when they know about it and they do have a job to ensure that there facilitation is not being used for money laundering or other such activities. The new Consumer protection Act certainly talks to the issue of facilitating fraud and specifies the right to have contracts cancelled in this case. What does that mean for a bank that knowingly provides financing to fraudulent franchisors. Can those loans be cancelled and they held responsible for the transaction?

On the cross side asking the banks to take more responsibility will be ensuring that loan facilities become even harder to access and you will pay for this risk in the repayments.

If you are hoping to see your banker as a partner in your business, best check out the development bankers, such as the Industrial Development Corporation or National Empowerment Fund. Since they accept a high percentage of risk they are better at evaluating the risk with you. If the business collapses they lose their cash too. So if you have to go after a franchisor that has defrauded you have a big partner on your side and you are out a considerably less amount of cash.

This is the second article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our first article which sets our tone.

In this article we look at the rare instance of being the first franchisee. In our move into the franchise game we were approached to be the first franchisee of a new concept of stores for an established restaurant chain – the chain we are currently suing. We turned down that deal these are some of our thoughts on being the “ground breaker”

Starting a business is a tall order for most people and even a scary prospect especially for non-entrepreneurs hence the preference of starting with a proven model where the concept, business plan, and operating system are already put together in a franchise package.

However every franchise system has a first franchisee. The groundbreakers or icebreakers if we may call them, are the people who risk it all in pursuit of success and financial excellence.

And as important as success is to the first franchisee, it’s even more important to the franchise company. Their future growth will depend to a great extent on the validation and results of the first franchisee.

These are just some points to consider regarding getting involved with a startup franchise outfit, or an outfit that are expanding into new untested markets.

• Ground breaker: The first franchisee is comparable to being a first child. Being first means getting all the extra attention that normally comes with the position. The challenging thing is that the first child has to break the ice on every little thing. This makes it much easier for the children that come later, but it’s sometimes a real pain for the first child. They have to effectively train the parents to be reasonable and have realistic expectations, and this is often the same dynamic at play between the franchise company and the first franchisee.

• Acceptance of risk: As a first franchisee, you must be much more accepting of risk than a normal investor. Bold and brave, you should also be the type of person who’s willing to deal with a more fluid situation, where changing and adapting to unforeseen circumstances is a welcome part of business development. The first franchisee is usually a true entrepreneur and, much more so than later franchisees, is a partner with the franchise company in the development of the franchise system.

• Comfortable with uncertainty: It’s essential for both you and the franchise company to understand the unique role the first franchisee plays. The first franchisee is a person who’s comfortable with the uncertainty involved in being the groundbreaker for a system. The good news is that you’re undoubtedly going to receive a great deal of extra support from very senior staff of the franchise company. The bad news is that you’re going to represent a learning environment for the franchise, and you need to be accepting of that role.

• Learn by making some mistakes: Have realistic expectations. No matter how well the franchise prototype operations have performed, it’s going to be different running the first franchise unit. You aren’t going to intuitively understand everything about the business, and both you and the franchisor are going to learn by making some mistakes. There must be a fair amount of open and frank communication about what areas of the business are set in stone, and what areas will involve testing and learning as you build your business.

• Fair deal: The reality is that the franchisor is going to be using you as a learning tool. So both sides need to be reasonable about who should pay what in terms of “tuition” for this schooling. Though the support level given to the first franchisee is typically much more significant than for later franchisees, other value factors, such as the system documentation, are probably not going to be nearly as well defined or developed as they’ll be later. When negotiating the franchise agreement and other financial considerations, you should address these factors. Both you and the franchisor must feel the deal is fair and proper.

The following are the pros and cons of being the first franchisee:

Pros

• Availability of open territories: One advantage is the availability of open territories. The market has to be completely open.Today certain markets are closed and gaining entry into them is some what cumbersome however due diligence in research, realization and utilization of open markets can bring huge success to the franchisee. Give an example. I’m not exactly sure what you mean by an open market

• Financially sound franchisor: A financially sound franchisor committed to growing the franchise, and committed to the franchisees can be invaluable to the franchisee. The franchisor’s commitment has to be unquestionable as the first franchisee would rely on their support more so than later franchisees when systems are in place. (rephrase this- and the absence of such would be a tonic for disaster.  )

• Franchisor participation in risk sharing: Your success as a first franchisee is as crucial to you as to the franchisor because not only will you provide a bench mark of proven systems you will also provide a basis for a successful track record. To this regard the franchisors are likely to shoulder a larger risk in the business and operations than they would with later franchisees.

• Investor participation in risk sharing only a private investor would come on board with an unproven concept: Investors like the Industrial Development Corporation (IDC) who come on board as partners until the loan is repaid provide the much needed security for first franchisees considering the unproven systems and franchisor inexperience in dealing with franchisees and the business expansion itself.

Disadvantages

• No proven systems: You can receive a lot of glory and recognition for your part in advancing the franchise system, but there are certainly trade offs. You won’t have other franchisees to consult with that have already traveled the path before you. You’ll have lots of support and assistance, but the support won’t be tested and proven on others, so mistakes are going to be made. You’ll have to make your decision to get involved with the franchise without the benefit or assurance provided by an existing system with a number of successful franchisees, and that increases the risk of getting involved.

• Expandable concept: The biggest thing you want to look for is a concept that is expandable; your best bet today is really researching the franchise opportunity for uniqueness. Does the concept have a niche, or is it a blatant copy of another concept? Can you set yourself apart from your competitors? Unless the concept is expandable, franchisees are not able to extract value out of the transaction. However most people looking to buy into a franchise  don’t consider such a crucial factor hence they buy into already saturated lines of business like the fast food outlets.

• Chances of obtaining finance: The chances of obtaining finance from any institution on an unproven concept are slim if not next to nothing and the prevailing economic conditions have forced the crafting of more stringent criteria for obtaining finance. A business which has less than ten operating outlets is usually not considered a bankable franchise entity hence making it difficult for first franchises.

Perhaps the best approach for expanding the franchise model is to open up these initial franchises as partnerships between franchisor and franchisee. This protects both interests. From a franchisor perspective they get to protect their investment and further expansion of a new model and for a franchisee, you get the support and investment needed to set up and test a new business concept.

The sharing of risk is the safest and fairest approach to expanding a franchise concept model.

This is the complete unedited article written by Ravi Naidoo. Ravi is Group Executive for Research & Information at the Development Bank of Southern Africa. He writes in his personal capacity. A edited version was printed in the Sunday Times a few weeks back.

Every action, and failure to act, has a consequence. And at certain times, the actions are more urgent and the consequences more critical. Today, as we collectively look back over the many things achieved since democracy in 1994, we must take responsibility for much of what has not worked since that time. Almost fifteen years on, our ability to credibly blame our current failures on the Apartheid legacy is fast fading. Indeed, for better or worse, South Africa’s democracy is harvesting what it has sown.

To be sure, the list of achievements is long and is some cases remarkable. Few societies could have undertaken such a wholesale and simultaneous change of laws and institutions, right across the State, private sector and civil society.

Our overriding achievement has been to put in place an extensive framework of individual rights, backed up with a deliberate and active focus on driving through measures to promote redress and equity. In terms of numbers, there has certainly been redress. Today, there are more young people attending schools than ever before. People’s access to water has reportedly increased from 62% in 1996 to 88% in 2007. Similarly, access to electricity for cooking has increased from 47% in 1996 to 67% in 2007. In fact, a reading of the Presidency’s Fifteen year Review gives an overly full list of the achievements.

Yet, here we are. We all know that things are not nearly so rosy. There have been thousands of local community protests and behind the political ruptures today is a fundamental concern about the performance of government. So what is going on?

At the heart of our failures are the choices we have made.

First, we have chosen, in practice, to make equity and redress the focus of our transformation. Equity and redress is clearly necessary and no one can argue that we do not need this given our history of systematic deprivation and inequality.

But the focus on equity has come at the price of excellence. In focusing on quantity the focus on quality was lost. Perhaps it is because differentiation (the necessary focus on the best) is confused with unfair discrimination. However, access to mediocrity is no way forward. Thus we have increased access to education whilst the quality of education for South Africa as a whole has deteriorated. Teacher development and performance has been neglected. Up to 50% of children in grade 6 fail literacy and numeracy tests, placing South Africa among the worst performers in the world, below our far more resource-constrained African peers.

Our response to that includes allowing learners to attain scores of 33%-40% to matriculate, after your grades have been inflated. The quality of the passing student leaves you in no doubt as to why universities are struggling to improve their graduation rates. Based on international tests, less than 10% of South African learners can compete with the best 75% in the developed countries. Quite frankly, if we continue to produce such results from primary school through to universities the future for a broad-based economy built on quality jobs will remain bleak.

This is the second choice that has been made post-1994: it is rare that anyone is held accountable for poor results. In the private sector, in a competitive market, if people don’t like your product, they will stop buying it. In the public sector, the theory is that the citizen will change or withhold their vote, and hence the political party will be forced to ensure its service providers do indeed serve the people well. Clearly this has not happened. While this is worse in conditions of a one-party state, the mere existence of political competition will not change this unless the political contestation becomes a contestation about service delivery. Indeed, patronage-based rivalry could actually be negative for service delivery, as it will retain incompetent managers who are key role players in dispensing patronage.
A third choice is the manner in which we have defined “transformation” to mean a change in the complexion of the management of institutions. Clearly many of the Apartheid era managers had to go. And many of the new, black managers were world-class. But transformation often ignored the core business of institutions, the need to deliver to the people and to empower citizens to get on with their lives. Ironically, as competence became de-emphasized in appointments, even the best black candidates lost out. Hence, in the angst over the need for better municipal basic services, we find 66% of municipal managers having neither a degree nor more than five years experience. The no-degree figure rises to 85% for CFOs and 90% for heads of technical units. To be sure, South Africa does have enough black and white skills to fill the most crucial of these posts.

A fourth choice is the dismantling of discipline. Yes, Apartheid discipline was bad. But what have we put in its place? The answer is that we have dismantled Apartheid discipline without putting in place an effective system of discipline appropriate to a democratic order. Discipline has deteriorated in hospitals, schools and the public service in general, with severe consequences for staff morale and work organization. The ANC in Polokwane introduced a “non-negotiable” resolution for teachers, that they must be in-class, on-time and teaching. That such a resolution was needed in the first place tells its own story. In a similar vein, COSATU-think tank, Naledi, found that discipline had collapsed in some hospitals.

A fifth choice is the avoidance of honest reflection on the outcomes we have achieved. If you do not measure your outcomes honestly and create a safe space to discuss them then you must fail. Because of the acrimonious debates and a breakdown in the social compact since the mid-1990s, mainly due to disagreements over economic policy choices, we have reverted to defensive evaluations. Much of it is spin.We have avoided putting in place management information systems that reflect the real outcomes. And we have avoided real discussions between social partners. Yet, in reality, implementation can never be centrally determined because most programmes – whether education or inflation targeting. It can only be achieved with cooperation from key stakeholders that must implement (be it government, organized labour or communities). This does not mean giving everyone a veto, but it does mean measuring everyone’s performance, even those of stakeholders, and holding everyone publicly accountable for their contribution.

As South Africa heads into its next term of government, we need to honestly reflect on the lessons of the past fifteen years. South Africa’s performance in the past.

Fifteen years has been mediocre. There is an opportunity and imperative to do better in future. But this will not arise from any economic “miracle” or massive increase in resources. If anything, the domestic and international economy will be more constrained over the next five years. Improved outcomes will come from the tough choices we make. In his election campaign, Barack Obama coined the phrase, “We are the ones we’ve been waiting for.” That applies fully to South Africa, where – whether we like it or not – we are living in the season of consequences.