Futuregrowth report reminder over SOEs
Amid the euphoria that followed President Cyril Ramaphosa’s late-night cabinet reshuffle in February, asset manager Futuregrowth quietly released the report SOE Governance Unmasked.
The response has been relatively muted, but it’s easy to forget just how important was the event that prompted Futuregrowth to produce the report — and just how much of a turning point that was.
When Futuregrowth went public in August 2016 on its decision to suspend lending to six state-owned enterprises (SOEs), it was the start of a process in which the discipline of the market was brought to bear on wayward SOEs and their shareholder. It put the spotlight on the dysfunctional governance of SOEs.
Arguably it opened the way for the ensuing stern action when the full extent of the corruption and capture of the SOEs began to emerge during 2017, when bankers and investors sanctioned the likes of South African Airways (SAA) and Eskom by pulling lines of credit and closing off access to capital markets.
Their actions put those entities at risk of default, threatening SA’s fiscal and financial stability, but they put the pressure on for governance reforms and prompted the recent overhauls to SAA and Eskom boards. While decent boards are not in themselves a solution to the profound financial crises facing the two entities, they are a precondition.
August 2016 was before former public protector Thuli Madonsela’s State of Capture report was released and the Gupta leaks hit the media. But there was already a stream of bad news about SOEs in the media by the time the Futuregrowth credit committee had to consider three large new 10-year loans to two stateowned development finance institutions in August 2016.
The event that triggered the decision to suspend lending to the six SOEs was the cabinet decision to set up a new SOE Coordinating Council chaired by then president Jacob Zuma. There was already an SOE review committee chaired by then deputy president Ramaphosa that had reported in 2013.
The recommendations of that committee have not been implemented and the lines of authority and accountability for SOEs are as inconsistent and erratic as before.
Futuregrowth had developed a unique knowledge base on this and it’s still learning, credit and equity process manager Olga Constantatos said on Tuesday. It found that the usual tick-box governance due diligence with its focus on board structures and processes didn’t work to understand SOEs, hence its research and engagement. Without the right people with integrity and the company’s interests at heart, any policies and processes were at risk, Constantatos said.
Futuregrowth’s actions put SOE governance firmly at centre stage. The market has rewarded SOEs that have been more responsive to the asset manager’s governance probe and that are more transparent.
Eskom, however, struggled to raise even R20bn in shortterm liquidity earlier in 2018 and has been unable to access the public debt capital market at all since the middle of 2017. Transnet suffered three failed bond market auctions in 2017.
They are, in effect, still on the Futuregrowth blacklist, while the other four have been reviewed and engaged with, and the Land Bank and Development Bank have lately succeeded in accessing the bond market for long-term money at good rates.
Constantatos said the asset manager was sometimes asked why it worried about governance when some of the debt was government guaranteed and investors would get their money back anyway. One answer is that governance failure will over time lead to financial degradation.
Another is that “we look after public money in public capital markets”, she said, and SOEs should be just as accountable and transparent as any other issuers on those markets. The JSE’s debt market is not nearly as transparent as its equity market and investors have long pushed for tougher listings requirements for debt market issuers, in the public sector and the private sector. The JSE has made a start with changes to require debt market issuers to publish their annual financial statements on Sens.
Another gap relates to directors and disclosure. The JSE’s equity market requires that directors submit information on their qualifications, CVs and potential conflicts of interest so shareholders can challenge their appointment. There is no such requirement in the debt market, nor are issuers even required to publish material information on Sens, for example on the appointment of new directors.
The process of reforming SOE governance has hardly begun and is an urgent imperative. But so too are broader reforms to ensure transparency and good governance at all companies that borrow public money on public debt markets.
JSE’S DEBT MARKET IS NOT NEARLY AS TRANSPARENT AS ITS EQUITY MARKET AND INVESTORS HAVE LONG PUSHED FOR TOUGHER LISTINGS REQUIREMENTS