Get Your Price Right Presented by: Dawie Roodt 24 July 2007.

Get Your Price Right

Presented by:Dawie Roodt24 July 2007

Price of Building a Name

Source: The Economist

January 20-26, 2007

Full page advertisements

(Est. Cost: £87,500)

The Oppositionp. 15

The Home Teamp. 17

Value for Money?

Macedonia South Africa

Taxes

Efficiency

Competitive labour

Access to markets

Stability

Infrastructure

Property rights -

But why say it?

Price of Growth

2006 2007

M3 (end of year) 23.1% 23.7%PSCE (adj. end of year) 27.6% 21.5%CPIX (average) 4.6% 5.8%Prime (full year) 12.5% 13.5%Current Account: GDP -6.4% -5.5%R/$ (end of year) 7.04 6.78Unemployment (strict definition) 26.0%GDP (full year) 5.0% 5.4%

Economic Overview

The Price of Fiscal Stability

Higher Growth = Higher Taxes?

Background

State Debt:GDP

25

30

35

40

45

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

%

Good/Stable

Debt Trap Recovery

Source: SARB and own calculations

Revenue Sources (Est. 2006/07)

29%

25%28%

4%

4%

10%

Individual Tax

Company Tax

VAT

Excise Duties

Fuel Levy

Other

Contribution to Fiscus

Budget Revenues (per $ GDP) by Country, 2006

Dollar Revenue per Dollar GDP

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0 20 40 60 80 100 120 140 160Countries

$

Source: Nationmaster: CIA, World Factbook

Libya

Kuwait

Afghanistan

South Africa

Average: 0.32

Median: 0.29

Collection cost: 1.3% of revenue; US 0.5%

Company Tax Rate, per Country (2006)

Company Tax Rates

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50 60

Countries

%

Source: worldwide-tax.com

South Africa

Bulgaria

Egypt

Average: 26.6%

Median: 29.0%

Ireland

USA

South Africa + STC (’06)

South Africa + STC (’07)

Individual Tax Rate, per Country (2006)

Individual Marginal Tax Rates

10

20

30

40

50

60

0 10 20 30 40 50

Countries

%

Source: worldwide-tax.com

South Africa

Russia

Denmark

Average: 35.4%

Median: 36.0%

USA

Ireland

VAT Rate, per Country (2006)

VAT Rates

0

10

20

30

0 10 20 30 40 50

Countries

%

South Africa

Ireland

Denmark

Singapore

Source: worldwide-tax.com

Average: 16.7%

Median: 18.0%

Fiscal Efficiency: Revenue Summary

Average tax red tape Individual tax rate: above average (high marginal rate, low

threshold) Company tax rate: above average VAT rate: below average

But the Result is…

GDP at Market Prices

GDP market prices, q:q seasonal

-1

0

1

2

3

4

5

6

7

8

1994 1996 1998 2000 2002 2004 2006

%

Source: StatsSA / Own forecast

Price Theory

Functions of Price

Co-ordinates customer demands and supplier constraints Signals changes in demand and supply Ensures economic efficiency Optimal allocation of resources

Source: Kaplan Schweser, CFA Institute Notes, Economics

Market Forms

1. Perfect competition (identical products)2. Monopolistic competition (product differentiation)3. Oligopoly (similar or differentiated)4. Monopoly (single seller)

Obstacles to Efficient Allocation of Productive Resources (Market Distortions)

Price controls, such as price ceilings and floors (rent control, minimum wages)

Taxes and trade restrictions (subsidies and quotas) Monopoly External(ities) (e.g. pollution) Public goods and common resources Price Discrimination A Black market Illegal Goods (e.g. drugs)

Perfect Competition

“The point is, ladies and gentleman, that greed – for a lack of a better word

– is good.”

-Gordon Gecko, Wall Street (1987)

Perfect Competition- The way the world should work…

A Price-taker market Assumes:

Identical products Large number, independent firms Small relative to total market No barriers to entry/exit

E.g. Road transport (containers), Air transport (excluding SAA)

Definition Source: Kaplan Schweser, CFA Institute Notes, Economics

Consumer and Producer Surplus at Equilibrium

Price

Quantity

Market Supply (MSC)

Market Demand (MSB)

Equilibrium Price

Equilibrium Quantity

Consumer surplus

Producer surplus

- Optimal allocation of resources

- Maximum social

gains

Cuppa’ – Impossible to Make

Price of Cappuccino- With Cream

Price of Cappuccino with Cream

9.09.5

10.010.511.011.512.0

R

Source: www.ideate.co.za / Own Research

Price of Cappuccino

Price: Maximum 12.00 Minimum 10.00 Mean 10.94 Standard Dev 0.87 Price differential: 20.0%

Production costs example: Estimated mark up of 150% on coffee (US) 40c to make $1 cup of drip coffee <$1 to make latte that sells for $2.5

Source: Tim Harford. The Undercover Economist / Own Research

Self Discrimination “I love it when you talk foreign”

Cappuccino R11.50

Hot Chocolate R10.50

Caffe Mocha R12.50

White Hot Chocolate R16.90

Caramel Hot Shot R19.90

Cappuccino – no frills R11.50

Hot Chocolate – no frills R10.50

Mix them together – I feel special R12.50

Use different powder – I feel very special R16.90

Use different powder – I feel greedy R19.90

Translation:

Source: Tim Harford. The Undercover Economist / www.muggandbean.co.za

Do You Have a Light…?

Suppliers want to decrease consumer surplus, without lower sales volumes

How? - Choice of luxury I.e. Smoke out customers less sensitive to price

Price of Milk - Clover Full Cream

Price of Milk, 2L Full Cream (Plastic Bottle)

12.5

13.0

13.5

14.0

14.5

15.0

15.5R

Source: Own Research

Price of Milk - Clover Full Cream

Price (2L, plastic): Maximum 15.45 Minimum 12.99 Mean 14.28 Standard Dev 0.88 Price Differential: 18.9%

Producer: Average price received by farmer between R2.60 and R2.80

per litre (Eastern Cape) National Average around R3.0 per litre – Clover CE

Source: Landbouweekblad / Own Research

Rare Delicacies Uisce Beatha “water of life” (Gaelic)

Age Price (R) % Increase

12 years 229

15 years 380 65.9%

18 years 546 43.7%

21 years 1,058 93.8%

30 years 2,152 103.4%

Malt whiskey must contain no grain other than malted barley

Only differentiated by age (storage cost)

Source: www.makro.co.za / glenfiddich.com

Administered Price

Parastatals

Eskom Transnet:

Rail (Spoornet and Transwerk) Ports (Sapo and NPA) Pipelines (Petronet)

Telkom Acsa South African Airways (SAA) Sasol DWAF SA Post Office

White Elephants

Dead Elephant #1: SAA Financial Results: Net profit (loss) for the year:

2002: R2.1bn 2005: R0.6bn 2003: (R5.9bn) 2006: R0.07bn 2004: (R8.6bn) 2007 (interim): (R0.6bn)

Bailout 1: 2004: R6bn from Transnet Bailout 2: 2007: Seeking between R2bn – R4bn? CE salary 2006: (including contributions and bonuses): R6.8m NO JUSTIFICATION FOR MANGO – IMMORAL!

White Elephants

Dead Elephant #2: Sentech Another bail out – needs R1bn! CEO spend R10m on golf sponsorship

Dead Elephant #3: Denel Recorded losses for 10 years, should break even from 2009 – Shaun

Liebenberg, Denel CEO Asked state for R5.0bn cash injection Another bail out?

White Elephants

Predatory Elephant: Telkom Telecoms cost major obstacle to GDP growth! Sate should consider selling 37% stake in the group!

What happened to privatization? Telkom value – R52bn ACSA value – R50bn+

Acsa Shareholders:

State – 80.0% Public Investment Corporation (PIC) – 20.0%

Parking and landing fees to increase at average 11.4% p.a. between 2007-2011

Passenger Service Fees to rise between 46.0% - 50.0% y:y on 1 October 2007

Capital Expenditure of R20bn towards 2010 New King Shaka Airport (Durban) to cost R7.0bn (Existing airport can

be sufficiently upgraded for R1.0bn) O R Tambo expansions of R4.0bn

Source: Acsa, Financial Mail, June 2007

Monopoly

Monopoly

Barriers to Entry: Legal Barriers

Patents, copyrights, government granted franchises Natural Barriers

Average cost falls throughout range of consumer demand Large economies of scale

E.g. Eskom/Spoornet/Telkom

Definition Source: Kaplan Schweser, CFA Institute Notes, Economics

Monopolistic Competition

Monopolistic Competition

Large number of independent sellers Differentiated products (at least in the minds of consumers!) Firms compete on price, quality and marketing Products are perceived by consumers as close substitutes

E.g.. Telkom and Neotel when it enters market

Definition Source: Kaplan Schweser, CFA Institute Notes, Economics

Oligopoly

Oligopoly

Small Number of Sellers Interdependence among competitors (Cheat or not to cheat -

Prisoner’s Dilemma) Significant barriers to entry (often large economies of scale) Products similar or differentiated

Eg. Mobile Phone market (Vodacom & MTN control 90%)

Definition Source: Kaplan Schweser, CFA Institute Notes, Economics

Oligopolistic Markets in South Africa, in 1990

Product Number of firms supplying over 75 % of the market

Aspirin 2

Sugar 2

Breakfast oats 3

Cement 3

Mealie meal 3

Fertiliser 3

Washing Powder 4

Petrol 5

Toothpaste 5

Source: Mohr P. and Fourie L. Economics for South African Students, 1998

Prisoner’s Dilemma

Prisoner B is silent Prisoner B confesses

Prisoner A is silent A gets 6 monthsB gets 6 months

A gets 10 yearsB goes free

Prisoner A confesses A goes freeB gets 10 years

A gets 2 yearsB gets 2 years

Actual

Oligopoly Application

Firm B honours Firm B cheats

Firm A honours A earns eco profitB earns eco profit

A has eco lossB earns higher eco

profit

Firm A cheats A earns higher eco profit

B has eco loss

A zero eco profitB zero eco profit

Actual

Other Rare Delicacies

Know Your Choices…

Name Perks Price (R), All night

Zelna Montana 2,000

Air Hostess Mile High Club… 1,800

Dirk’s Debbie ? 1,300

Chinese Queen 24-7 1,300

Cute Jade Boeremeisie, hunting weekends

1,200

Natasha Not Nights (Married?) 800

Source: Own Research

Pretoria and Surrounding Areas

Get Your Price Right!

Price (R): Maximum 2000.0 Minimum 800.0 Mean 1400.0 Standard Dev 433.6 Price differential: 150.0%!

Married Men's Saving: R1400 * 3 * 4 = R16,800 p.m. Medical Treatment: doctor(R250), STD (R240*3), HIV (R700 p.m. ARV’s life

long), pathologists (R1000+), antibiotics, related sickness, hospitalisation, etc…

Source: Jhb pharmacy, medical practitioner Price may vary

Asset Allocation

Asset Allocation Reason

Equities Demand/Rand

Bonds Inflation/Supply/Interest Rates

Cash Short Interest Rates

Property Property Cycle

– Heavy Overweight

– Overweight

– Neutral

– Underweight

– Heavy Underweight

Local Equities, 2006Economic Sector MC EAA JSE Sector

Mining and Quarrying 32% 33% Mining, Platinum, Gold, Coal

Finance, prop and bus. serv 30% 25%Banks, Insurance, Life Ass, Media & Pht, IT, Property, Support Serv

Manufacturing 12% 18%Auto, Basic Ind, Beverages, Chem, Elect, IT Hard, Pharm & Bio, Steel & Other

Personal Service 6% 5%Cyc Serv, Health, Leisure Ent, Non-cyc Serv, Person Care

Transport, storage and comm. 6% 6% Telecomm, Transport

Trade, hotels and restaurants 6% 4%Cyc Cons, Food & Drug, Gen Retail, House Goods, Non-cyc Cons

Electricity, gas and water 4% 3% Oil & Gas

Agri, Forestry and Fishing 3% 1% Food Prod

Construction 2% 5% Const & Build

100% 100%

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