Finance minister Pravin Gordhan has been admonishing South Africans for years because we love to spend, but hate saving money. When he’s not giving government an earful over spending or wasting finances, he’s lambasting banks because he believes high fees hamper saving.

Gordhan’s always extolling the virtues of saving, though, and imploring us to squirrel away some cash. The finance minister says South Africans’ reticence to save is because of “people’s short-term outlook, the lack of transparent and cost-effective savings products, and poor financial awareness among potential savers.”

Gordhan points his finger at “the consumerist attitude in South Africa, which often has the ultimate impact of more and more people being highly indebted”. He believes we need a new mindset and further believes that, by sacrificing the “fool’s gold” of consumerism today, South Africa could build a richer tomorrow.

South Africans across the board aren’t big on savings. The World Economic Forum’s Global Economic Competitiveness Report for 2011–2012 lists gross national savings as an indicator for national competitiveness.

China has one of the highest savings rates in the world, as do Algeria, Brunei and Singapore, which are among the globe’s top 10 fiscally prudent. India and Norway are among the top 20, and Nigeria is the top-performing African country in that regard. 

South Africa sits about half-way down the list at 72 out of 141 countries, buoyed between Lebanon and Syria. This country’s gross national saving rate, expressed as a percentage of GDP, is 20%.

But at least we’re doing a little better than the United States, which is ranked at 121. Swaziland’s the worst saving nation in the world: our besieged neighbours are at the very bottom of the rankings.

Why is it important to save? Traditional economic wisdom on the relationship between a country’s economic development and its savings rate will have us know that there is a strong correlation between savings and growth. Simply put, increased savings accelerate growth. This is particularly important in emerging economies that don’t have ready access to innovation or the technology resources that richer, more established economies enjoy and which drive progress.

There’s a lot South Africa needs to do in order to grow, and saving is an achievable goal, but what incentives do locals have to save? Let’s face it, there’s not a hell of a lot of fiscal responsibility in government, and our leaders are not exactly models of frugality.

If you open up a bank account to save, there’re the finance charges that eat up your hard-earned dosh, and government still wants to tax you on the cash you stash away. Interest rates are low and there’s a huge amount of political uncertainty, which doesn’t engender consumer behaviour focused on sacrificing the now for a better national interest at some later date.

All things considered, getting South Africans to save seems a Herculean task. Or is it? Not according to a case study by a local bank that launched a “fun” savings product years ago that got locals to save in droves.

Called Million-a-Month and devised by FNB, the endeavour was so successful that tens of thousands of people were signing up for accounts each month and about 20% of the people who opened accounts had never engaged a bank before. Using this promotional product, FNB opened 750,000 accounts and collected R1.2-billion in deposits.

“The growth was phenomenal and when the programme closed down people didn’t take their money out,” Robert Keip, one of the brains behind the Million-a-Month project, tells Daily Maverick. “There was an initial run-off, but the majority of it was very sticky and stayed in the banking system.”

Before the first Million-a-Month account was opened, FNB got written authority from the National Lotteries Board and Uthingo, the company that operated SA’s lotteries during that time, to run with the product. But nobody expected the product to be as successful as it became. When it was evident that people were flocking to the product, the lotteries board got the courts to close FNB’s savings innovation down.

Keip subsequently moved on from FNB and today heads up a private label credit card for a leading health insurance and financial services company. There he tells me all about the Million-a-Month story.

“When I was at FNB, I was looking at how to grow the deposit base,” says Keip. “Unless you get people to save, banks can’t engage in productive lending and lending is important because it enables people to start businesses, create jobs or to buy homes.”

Yes, people need to spend as well to grow economies, but there needs to be as much of a drive to get people to save. Keip says banking deposits have become less and less attractive for people because low interest rates and tax disable meaningful capital growth.

“Interest rates used to be 15% and people lived comfortably on that, but when you get down to interest rates of 5%, there is very little incentive for people to invest in money because alternative investments like a second property or the stock market become more attractive,” he says.

Keip and his team were tasked to come up with an innovation that would get people to put their cash away in bank-type savings. They looked around and stumbled across a financial instrument that’s been used by governments for centuries to raise capital for all sorts of things, albeit mostly for wars.

As the 1600s drew to a close, King William of Orange needed funds to finance the Nine Years War (1689-97) to defend Britain against an invasion from a European coalition led by King Louis XIV of France. The solution was a lottery-linked savings scheme. The lottery-type savings plan was launched, 100,000 tickets were offered at £10 each and the crown had the funds it needed to fight a long and costly war.

The return on the investment on the world’s first war bonds was £1, but investors were also eligible to win annual prizes, which ranged from £10 to £1,000. Anne Murphy writes about the pioneering UK savings scheme in her investigation of lotteries in the 1960s, and reports that tens of thousands invested in what became the first war bonds, at a time when Britain had a population of about five million.

South Africa used a similar scheme to fund the apartheid apparatus. Bonus bonds were introduced by then finance minister Owen Horwood in 1977 when he tabled a R1.6-million defence budget, and launched the savings instrument at the same time. Horwood’s rationale was that the increased military budget could be financed through the bonds without cutting government expenses or raising taxes.

If a lottery type savings worked so well to raise money for war, could it be used to teach people to save? More so, could a bank create a product that could actually make saving fun?

These were the questions that Keip and his team asked themselves. The answer they came up with was Million-a-Month, the savings product that had no banking charges. “People don’t want to see their capital disappearing,” says Keip. “We needed to make the product accessible so that people could invest small amounts. Basically, we wanted to change people’s behaviour by randomly paying interest.”

Here’s how the prize-based savings account worked. People opened up a savings account. The minimum opening deposit was R100, and each deposit represented one entry into the competition draw. No bank charges were levied. The account had a nominal interest rate. The interest was pooled. The pooled interest was paid out on a monthly basis to a random account. Prize drawings were held monthly and 114 prizes were awarded to account holders. The prize ranged in value from R1,000 to R1-million.

The Million-a-Month accounts accrued a rate of interest comparable to other similar type savings accounts, and getting a few rands one day on your R100 wasn’t the attraction. The lure of winning the big pool was. What made the savings fun was the chance of winning enough money to change one’s life – it was the opportunity for people to gamble for a big win without losing their initial investment. It was a win-win lottery-type savings that really changed consumer financial behaviour on a large scale.

But just as things were getting interesting, the lottery board pulled the plug on the project, despite giving Million-a-Month written consent to go ahead earlier. “Before we launched, we got a sense of legal opinion on the legality of the product. The legislation (the Lotteries Act) was brand new, but once the regulations were out, our legal people said we were fine and didn’t fall foul of the Lotteries Act,” he says.

Keip says lottery operator Uthingo initially indicated it didn’t have any issues with the bank’s new product. Neither did the National Lotteries Board. “We wrote to the lotteries board and they replied and said they viewed Million-a-Month more as a promotional competition, and didn’t have any problems with it.”

Six months after launch the board did an about-turn, says Keip. “I think it was the success of the product. Not that we were denting their takings, and if we were, it was very slight. But they had issues. We started to consult with them, we had an existing agreement in place. We went through a protracted legal process to try to win our case. We petitioned and got an appeal. We went to the Supreme Court, and we lost there.”

Despite closing the project down, people across the world had heard about the innovative savings product and how immensely popular it had been.

In 2008 Peter Tufano, then professor of financial management at Harvard Business School, brought a group of academics from Harvard and Princeton to meet those concerned at FNB and understand the product. Tufano is now Dean and Professor of Finance at Saïd Business School at Oxford University. His work has influenced US policy initiatives and helped pioneer a new class of American savings product.

Both Tufano and Keip caught the attention of the Freakonomics author Stephen Dubner who did a podcast of prize-linked savings plans, which Dubner called a “No-Lose Lottery”.

Keip was approached to address a closed-door meeting in Washington with Sheila Bair, chairwoman of the US Federal Deposit Insurance Corporation. At the time, Bair was rated the second most influential woman in the world after Angela Merkel and ahead of Hillary Clinton, who had yet to become secretary of state.

“They identified us through all their research as a best practice, and wanted to get this kind of savings incentive started in America. They wanted very powerful people to start to lobby to begin to change lottery legislations in the US. The closed-door meeting included the heads of the biggest lotteries in America.”

Keip says the meeting renewed his view of the efficacy of lotteries. “The heads of the Georgia and New York state lotteries were present, and my impression of lotteries changed significantly after sitting with them. Their cost of administration is incredibly low,” says Keip, adding: “A well-run lottery adds real value to a country.”

Created in 1992, the Georgia Lottery has made a massive contribution to enhancing education in that US state. About $13-billion has been raised to better education, including $7-billion in scholarships, which have been distributed to over 1.4 million recipients during the past 10 years. The operating expenses for the management of that state’s lottery remain at less than 1% of gross ticket sales.

Asked what he thinks of the SA lottery, Keip says diplomatically: “I’d rather not comment.”

Daily Maverick’s pretty outspoken about what we think of the South African lottery, but for the sake of brevity we’ll merely focus on the incumbent operator, Gidani, which takes a hell of a lot more than just 1% of ticket sales. 

In its annual report for 2010/11 the National Lotteries Board Lottery says ticket sales “amounted to R4.7-billion inclusive of VAT”. Of this amount, 34% was contributed to the National Lottery Distribution Trust Fund. The local lottery’s trust fund has been bedevilled by bad administration, at times forcing NGOs reliant on the fund for income to close or verge on closing.

Not to mention the issues the lotteries board has had with bad management. In January, lotteries CEO Vevek Ram was forced into early retirement, with the DA saying he had “presided over a prolonged period of mismanagement and administrative chaos”.

And then there’s the matter of who benefits from Gidani while social development agencies wait for handouts that don’t come. Shareholders of Gidani include Gravitas Investment Holdings (10.8%), Intralot SA (18%), Kopano Ke Matla Investment Company (10.8%), Nozala Holdings (10.8%), Wheatfields Investments No 186 (10.8%), Vunani Capital Holdings (10.8%), the National Empowerment Fund (10%), SAPO (10%), NOBSA (4%) and the SA National NGO Coalition.

Intralot was founded by Sokratis Kokkalis, who has a rather colourful reputation. Kokkalis features prominently in Organized Crime in Bulgaria: Markets and Trends, published by the Centre for the Study of Democracy (CSD), which includes a case study on Greece.

The paper says the Intracom and Intralot founder was a Stasi agent (former East Germany’s reviled secret police) and gathered copious amounts of information on Greek politicians and the Greek secret service.

The CSD document asserts that Kokkalis became one of the richest men in Greece by controlling actors in the country’s political life. The paper further alleges fraud charges were laid against Kokkalis in 2003 related to a Russian gaming issue, and that he was implicated in the Siemens “black funds” scandal in which millions were paid to Greek politicians to ensure the German telecoms company won a lucrative bid.

Another shareholder is Kopano Ke Matla, the investment arm of Cosatu. The Mail & Guardian reports that in 2003 Cosatu strongly objected to the establishment of the lottery in Parliament, citing it would have dire consequences for the poorest of the poor.

Those objections have now vanished, given the returns Cosatu’s now making from the lottery through its interests in Gidani. The fact that Cosatu is a shareholder in the lottery operator didn’t stop the National Lottery Board from paying out about R1-million to the congress in the end of 2010, so it could celebrate its 25th birthday.

Court papers served by Uthingo on the minister of trade and industry, the lotteries board and Gidani to try to block the new operator from managing the lottery cites that ANC National Executive Committee members Max Sisulu and Chris Nissen were shareholders of Gidani, and that Cyril Ramaphosa was linked to Gidani through a trust. The DA said other Gidani shareholders included Independent Electoral Commission chairperson Brigalia Bam, and deputy arts and culture minister Ntombazana Botha.

Then there’s Nozala, which has a board member by the name of Maki Mandela, daughter of former president Nelson Mandela. More recently former home affairs director general Mavuso Msimang was appointed non-executive chairman of Gidani last year. Msimang was also a former CE of the State IT Agency.

The lottery board continues to make interesting politically aligned payouts. In 2010, R41-million was handed out to NGO Makhaya Arts and Culture, which employs Alfred Nevhutanda’s daughter. Nevhutanda is the chairwoman of the National Lotteries Board. Then there’s the R40-million given to the National Youth Development Agency for an ANCYL “talk shop” that same year.

In January last year the Weekend Argus reported that Gidani was fined about R15-million for two licence contraventions, and that “a cloak of secrecy has been thrown over what Gidani did in the past year to warrant the penalties”. The newspaper said the contraventions related to “security issues and go to questions about the probity, financial integrity or credibility of the operation”.

Lotteries are often referred to as “a tax on the poor”, but perhaps a better moniker for South Africa is that they are a tax on the ignorant. People buy Lotto tickets in the hope of being awarded life-saving winnings, but are they aware of how much money’s been made by the well-connected few? Are they aware that deserving NGOs are being overlooked as lottery funds are being handed out to political cronies? Are they aware that hundreds of protestors converged at the National Lotteries Board office in January to protest corruption?

Only 34% of lottery money went to social development and allied causes this past financial year which, given the many complaints against the board and Gidani, makes the lottery a vehicle for elite enrichment rather than social betterment.

Despite this, we still play the lottery in our millions. The big question that needs to be asked is: if South Africans dislike saving but love gambling and the lottery isn’t presenting a well-run vehicle for growth, isn’t it time to rethink projects like Million-a-Month, which actually encourage savings?

Shouldn’t we be lobbying for a national “no-lose” lottery in South Africa, where ordinary people risk nothing, stand the chance to win big and where surplus funds are funnelled to education and entrepreneurship, instead of being frittered away by government departments on frivolous expenses like multi-million rand ceremonies at Sun City?

Isn’t it high time we benefited from a responsible, prize-linked savings plan instead of a lottery hellbent on serving SA’s runaway elite? Then again, this is South Africa. DM

Read more:

• R15m fine slapped on Lotto operator on IOL.
• Charities struggle as Lotto’s R6bn stays in its coffers on IOL.
• How Gidani nearly lost the lottery licence on Media 24 Investigations.
• National Lottery Board meeting – listen to two clips of the Gidani discussion on Media 24 Investigations.
• Lottery bosses battle the jazz cats on Media 24 Investigations.
• Treasury proposing options to encourage savings in The Citizen.
• Banned FNB savings product to be piloted in the US in Mail & Guardian.
• Controversy swirls round Gidani in Mail & Guardian.
• Roll over and play dumb as the Lotto rips us off by Redi Tlhabi at TimesLive.

Resources:

• ‘Using Financial Innovation to Support Savers: From Coercion to Excitement’ by Peter Tufano and Daniel Schneider – download pdf.
• World Economic Forum’s Global Economic Competitiveness Report for 2011 – 2012 – download pdf.
• Download the National Lotteries Board annual report for 2010/11 in pdf format.
• Listen to the Freakonomics Radio – Is America ready for a ‘No-Lose’ Lottery?

Photo: Photo: Left – LOTTO for sale at Modimolle, Limpopo. Right – Customers at FNB’s Ikezi Agency in Dobonsonville, Soweto. Chris Kirchhoff, MediaClubSouthAfrica.com.