Risk factors
Stakeholders are advised to consider
the summarised risks described below in
conjunction with other information including
the consolidated annual financial statements
of the Netcare Group and the related notes
thereto included elsewhere in this annual
report.
the summarised risks described below in
conjunction with other information including
the consolidated annual financial statements
of the Netcare Group and the related notes
thereto included elsewhere in this annual
report.
The national nursing shortage in South Africa is
chronic, and poses a serious risk to the ability
to grow our operations in South Africa. It has
been exacerbated by a massive reduction in
the number of students being trained in South
Africa in the late 1990s, as well as a concerted
recruitment effort by developed countries such
as the UK, US, Australia, New Zealand, Canada
and the Middle East. South African nurses are
well trained and highly sought after internationally – so much so that there are an estimated 10 000
(of the 99 000) registered South African nurses
currently working in the UK.
Despite training about 1 500 basic and over
400 post basic students every year, we have
not been able to keep up with the demands
of our growing business. The vacancy rate for
registered nurses currently approximates 23%,
and in our highly specialised units (e.g. ICU)
this figure has risen to above 30%. We have
been able to mitigate that risk to an extent with
agency nurses, but we still believe this to be
a constraint and risk to our future operating
performance and growth. If we are unable to
adequately source suitably qualified nursing
staff, the growth and development of our
business may be limited, which could have a
material adverse effect on our business, results
of operations and financial condition.
As Netcare is a South African listed company,
our reporting currency is Rand. While the
rand has enjoyed appreciation against major
currencies over recent years, any significant
and sustained depreciation of the Rand would
similarly increase the cost of imported supplies.
To the extent that those additional costs could
not be recovered through increased selling
prices, the effect may be an adverse affect on
our margins. We would expect that any adverse
effect on our margins would be temporary,
and that our margins would remain largely
unaffected over the long term. The effect of a
depreciation of the Rand would also give rise to
an increased cost of imported equipment. This
would also give rise to increased depreciation
in future years as the assets are written off over
their expected useful lives. A deterioration in
the value of the Rand could have a material
adverse effect on our business, results of
operations and financial condition.
Our strategic development and growth depends
in part on the continued contributions of a
relatively small number of senior executive
officers and key employees. The loss of the
services of certain of these senior officers and
key employees could have a material impact on
our business, results of operations or financial
condition, and on our ability to develop and
grow our business. In addition, as our business
develops and expands, we believe that our future
success will depend on our ability to manage,
attract and retain skilled and qualified personnel.
The development and expansion of our
business and operations is likely to continue
to involve significant capital expenditure. Our
capital expenditure plans are likely to require
further financial resources, which may be met
from our own resources, further issues of debt instruments, equity-linked instruments or
ordinary shares, borrowings, or a combination
of these instruments. We cannot be assured
that financing will be available to us when
and in the amounts we may require, on terms
acceptable to us, or even at all. In addition, our
ability to borrow and spend funds is limited by
South African exchange control regulations. If
we do not have sufficient financial resources
or funding available to us when required to
fund our capital expenditure, the growth and
development of our business may be limited,
which could have a material adverse effect on
our business, results of operations and financial
condition.
Our operations are subject to various laws
and regulations in the jurisdictions in which
we operate, relating to such matters as
health and safety, anti-competitive behaviour,
employment and environmental issues.
Historically, compliance with these laws has
not resulted in material costs or expenditure,
or had any material adverse effect on our
operations. However, if we fail to comply with
any such laws or regulations, we could be
subject to liability such as mandatory shut
downs, damages, criminal prosecutions,
financial penalties, loss of trade agreements
or key contracts and injunctive action, which
could have an adverse effect on our financial
condition or results of operations. Future
changes in such laws and regulations could
also have an adverse effect on our financial
condition or results of operations.
Black Economic Empowerment (“BEE”) is a
programme launched by the South African
government to redress the inequalities of
the past by giving previously disadvantaged groups in South Africa (black Africans,
Coloureds and Indians) economic opportunities
previously not available to them. It includes measures such as employment equity,
skills development, targets for ownership,
management and preferential procurement.
BEE reaches far further than the affirmative
action programmes in other countries. It sets
quotas for black ownership of companies
across various significant economic sectors
in South Africa. BEE is actively supported in
South Africa, and has many benefits such as
preferential supplier status to government and
other compliant businesses. Should Netcare
fail to manage or comply with BEE charters,
insofar as they are implemented, or fail to
appropriately manage BEE compliance and
the required business return on investment,
the result of our operations and ultimately our
profitability may be adversely affected.
In addition, we are regarded by the South African
anti-trust authorities as having a large market
share in the South African private healthcare
market, and our South African operations are
subject to certain anti-competition legislation and
regulatory oversight. Certain expansions of our
operations in South Africa through acquisitions
may require regulatory approval. While to date
all of our South African acquisitions have been
approved by regulatory authorities, it is possible
that in future we may not receive approval
to make additional acquisitions or that such
approval may be subject to various conditions,
which could affect our ability to expand our
operations in that market. In addition to
refusing to grant approval for certain potential
acquisitions, the anti-trust authorities may take
other actions that could prevent further growth
of our market share in South Africa in other
ways.
We incorporate and own significant operations
in South Africa, and approximately 70,5%
of our total revenues were derived from our
Southern African operations for the financial year ended 30 September 2006. As a result,
political and economic risks relating to South
Africa could affect an investment in the bonds
and the ordinary shares.
Large parts of the South African population
do not have access to adequate education,
healthcare, housing and other services,
including water and electricity. Government
policies aimed at alleviating and redressing
the disadvantages suffered by the majority
of citizens under previous governments
may require us to implement certain costly
procedures in order to be compliant and
this could have an adverse impact on our
operations and profits. In recent years, South
Africa has experienced high levels of crime and
unemployment. These problems have impeded
fixed inward investment into South Africa
and have prompted the emigration of skilled
workers. If these conditions continue, our
South African operations may have difficulties
attracting and retaining qualified skilled
employees, as well as securing raw materials.
For the years 2003, 2004 and 2005, gross
domestic product (“GDP”) growth was 3%,
4,5% and 4,9% respectively; inflation rates
were 6,8%, 4,3% and 3,9% respectively; and
unemployment rates were 28%, 26,2% and
26,7% respectively. While the appreciation of
the rand over 2003, 2004 and 2005 resulted
in a reduction in the bank prime lending rate
in South Africa, the cost of capital, should we
have wished to borrow funds in South Africa,
was still higher than that of Europe or the USA.
This is even more the case following the recent
increases in interest rates in South Africa.
In the late 1980s and early 1990s, inflation in
South Africa reached record highs. In recent
years, the inflation rate has decreased from those levels. A return to significant inflation in South
Africa, without a concurrent devaluation of the
rand, could significantly increase our operating
costs and have a material adverse effect on its
operating results and financial condition.
We have large numbers of employees in South
Africa. Over the last few years, South African
labour laws have changed in ways that may
adversely affect our operations. In particular,
laws enacted since 1995 provide for mandatory
compensation in the event of termination
of employment for operational reasons and
impose large monetary penalties for noncompliance
with administrative and reporting
requirements in respect of employment equity
compliance, which could result in significant
costs to us. As of 30 September 2006,
approximately 42,1% of our employees in
South Africa belonged to unions. Labour laws
may continue to change in South Africa in
future years in a manner which could adversely
affect our business. Accordingly, we are at
risk of having our operations in South Africa
disrupted for indefinite periods due to health
and safety issues, strikes called by unions and
other labour disputes. In addition to strikes, we
may also experience work stoppages based
on national trade union protest actions called
to promote or defend socio-economic interests
of workers, or so-called “stay away” days,
which may be called regardless of the state of
relations with our workforce. Significant labour
disruptions at any of our operations could have
a material adverse effect on our business,
operating results and financial condition.
The incidence of AIDS in southern Africa,
which is forecast to increase over the next
decade, poses risks to us in terms of potentially
reduced productivity, our ability to recruit
skilled employees and increased related costs.
In addition, the increased incidence of AIDS
may lead to a decrease in consumer spending
within the local population which could
adversely affect the demand for our services
and products in southern Africa. The potential
impact of AIDS on our operations and financial
condition will be determined by a variety of
factors, including the incidence of HIV infection
among our employees, the progressive impact
of HIV on infected employees’ health, and
the medical and other costs associated with
the disease, most of which are beyond our
control. It is estimated that approximately 18
% of the South African workforce is infected
with HIV/AIDS. Significant increases in the
incidence of AIDS in southern Africa or among
our workforce could adversely impact our
operations and financial condition.
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