JSE Spending
Glitch in the system
Lindo Xulu | 16 August 2012
The JSE's 13-member management team has forfeited R7,3m in bonuses this year because of a debacle involving the upgrade to its IT system. But the question remains: is this enough, given that more than R300m has been written off over the past eight years on an upgrade which was never fully completed?
For almost eight years the exchange has been on a drive to modernise the back-office technology used by its clients, the stockbrokers, called the broker dealer accounting (BDA) system.
This week JSE CEO Nicky Newton-King said there had been "consequences" for the impairments, hence the forfeiture of the bonuses.
Over the past eight years, impairments on IT have grown to R328,9m. This is the breakdown:
R33m was written off in 2010;
R223,3m in 2011; and
R72,6m in the first half of 2012.
The broker community welcomed the prospect of an upgrade, dubbed Project Orion and launched in 2004.
However, from its inception the project appears to have been dogged by delays and missed deadlines.
The consultants appointed for Project Orion were Accenture and the upgrade was expected to be done in three phases.
The first phase was to focus on the exchange's internal systems. This was to be done by the end of July 2005.
Phase 2, which was to replace the more than two decades old BDA system and was due for implementation in the first quarter of 2005, was soon plagued by problems. Phase 3, which focused on the JSE's equity derivative automated trading system (ATS), was scheduled to be completed by the first quarter of 2006.
Phase 1 came online five months behind schedule and Phase 2 has not been implemented eight years later and after the high impairments.
In total the cost for Project Orion, according to the 2005 annual report, should have been about R206,2m, assuming it was completed on schedule. In the same annual report, under the note "contingent liabilities and commitments", the JSE said that in that year alone it had parted with R144,9m and admitted the project was behind schedule.
In 2006 the exchange updated its risk matrix, yet surprisingly it did not include IT projects. Instead it decided to make a separate assessment , focusing on the IT project, which would be consolidated in 2007. Despite having paid R146,8m to the service provider, of which R2,8m was paid in 2006, the exchange's risk committee chaired by Nigel Payne said in the 2006 annual report that the "committee was comfortable that appropriate governance structures and other mitigating actions were in place to adequately and timeously identify and address any risks that might arise out of the implementation of the project".
The following year, the exchange announced that it had terminated its seven-year contract five years ahead of its completion. While it might have seemed like the exchange was taking remedial action, that appears not to have been the case - an interesting deal had been struck with Accenture. Having realised that the JSE did not have the internal capacity to handle Project Orion, the two agreed that the project team be transferred to the exchange. The group was made up mostly of the same people who had not met the deadlines - the only difference was that the JSE exerted management control over them.
This arrangement was made in spite of Russell Loubser, the JSE's former CEO, saying the termination would not carry material costs.
According to the 2007 annual report capital expenditure totalling R243m for the next three years had been approved by the board for IT development and R127m would be spent in 2008. How much of this actually went to the implementation of Project Orion is unclear.
In the 2008 annual report nothing substantive was said about Project Orion. There was no mention of challenges in implementing the system, or whether deadlines had been met, except for a sentence in the CEO's statement alluding to continued upgrades to the BDA system, which Loubser admitted was "cumbersome to operate and costly to maintain owing to its age".
In the 2008 report Loubser said though the exchange planned to replace the BDA system, a time frame had not "been set".
In 2009, the JSE unveiled a new upgrade of the BDA, dubbed SRP, short for systems replacement programme.
Under the SRP, in addition to upgrading the general technology, the aim was to rectify what it had failed to do in five years: replace the BDA with what management called the next generation technology. In the 2009 annual report, Loubser informed investors that permanent staff numbers had risen from 92 to 131 between 2008 and 2009 after the exchange took its IT systems in-house.
In that period, other upgrades were done, including the installation of an equities clearing system, the redesign of a surveillance system and testing of all but one of the JSE's applications.
In spite of these successes, in 2010 the exchange impaired R33m due to "development costs in the back-office system and the upgrade of Sens". It said the Sens (stock exchange news service) and BDA systems were no longer expected to "deliver the anticipated value".
Again in 2010 capital expenditure worth R157m was allocated to replace the "JSE's technology ... including the back-office system (BDA), surveillance and clearing as well as the settlement systems", according to its annual report.
While most of the cost was incurred between 2007 and 2010, the bulk of the depreciation for the new data centres would be reflected in the income statement only in 2011.
Newton-King, who took over as CEO in January 2012, announced impairment charges of R223,3m after an "examination of the results of the software testing which had taken place in 2011", three months later.
In the 2011 annual report Newton-King said the SRP system was being reviewed. She later announced that a part of the programme would not be implemented.
The JSE revealed that a technical analysis found it would be "desirable" to completely rewrite one of the five components of the SRP.
The carrying value of the entire SRP as of December 2011 was about R158m, the JSE said in a Sens announcement in May.
It later announced an impairment of about R62m, later revised to R72,6m.
The forfeiture of the bonuses was made public in a trading update last Friday.
In that update the higher impairment figure of R72,6m was revealed, which it said was due to an increased tax charge.
The JSE said headline earnings per share for the half-year ended June 30 were expected to be between 10% and 20% lower than the first half of last year, also because of the impairments.
Paul Theron, CEO of private client investment business Vestact, says the news of the impairments is "disappointing". He says the JSE under Loubser did a lot right in transforming itself from a mutually held corporation into a listed institution.
"However its BDA system counts as a blot on his legacy. It's a travesty that it's cost them that amount of money yet they failed to implement the system. While forfeiting their bonuses makes sense, perhaps further action could be warranted," he says.
Newton-King says despite her disappointment with the impairments, it is not all bad news as some of the technology projects were "delivered on time and within budget". This includes moving the trading engine from London to Johannesburg.
Global Traders MD Charles Savage is critical of the amount of the impairments. "Unfortunately the JSE has a long track record of building systems no-one cares about. While I suppose when the initial investments in the BDA system were made the world looked different, it's still unforgivable for a company to impair that amount of capital."
