Failing SOCs: What can the private sector do?

Bakang Letshwiti from Absa Corporate and Investment Banking discusses the focus on state-owned companies (SOCs) at a post-budget review session.

TEBOGO TSHWANE: Finance Minister Tito Mboweni tabled the 2020 budget on the 26th of February. It has been described as the toughest budget since the dawn of democracy due to a combination of stagnating economic growth, declining tax revenues and unsustainable fiscal pressures brought on by public sector wages and bailouts to state-owned companies.

Joining me in studio is Bakang Letshwiti, the coverage sector head for state-owned companies at Absa Corporate and Investment Banking. She was also the MC of Absa’s post-budget review event where a panel of senior public sector leaders and astute analysts discussed the implications of the national budget with a particular focus on our SOEs [state-owned enterprises]. Bakang, tell me why Absa held this event?

BAKANG LETSHWITI: Thank you for providing Absa with this opportunity to put forward our story. We have this event on an annual basis. It’s been the eighth year running where after the budget speech in February of each year, Absa puts together a panel of clients – stakeholders from the public and private sectors – to discuss key themes that have come out of the budget speech. So this year we deviated from the norm where we normally discuss the budget speech broadly and people can come into the room to discuss and ask questions about anything that talks to them coming out of the budget speech. This year, of particular importance, was our state-owned companies.

Even in 2019, leading up to the medium-term budget policy statement in October, we saw entities – including Denel, SABC and SAA – receiving bailouts from the contingency reserve, which is essentially a reserve for emergencies that government normally uses for incidents like floods. For the very first time we saw National Treasury tapping into the contingency reserve to bail out the distressed entities. We saw appropriations and huge amounts being directed to Eskom, which is why we came up with the theme ‘A dialogue for change’ where we have a forum like this one [involving] important stakeholders, people who are actually leading our clients, where executives and staff members of the SOCs themselves, who deal on a continuous basis with the banks, with the investors [can engage]. And so it’s their story. They are right in the middle of it.

Our keynote speaker was the deputy minister of finance, Dr David Masondo, who had with him deputy directors-general from National Treasury who were playing a key role in putting together the budget for 2020. We also had investors who we had invited and one of the panelists was Olga Constantatos from Future Growth. So when we hold a forum like this one and bring together all of these people who interact throughout the year one way or the other, [in] having a discussion about state-owned companies, it is important to talk outside of the normal BAU [business as usual]: somebody asking for money, banks being asked to process borrowing requests, and investors being asked to put money on the table.

So we feel as Absa that we play a role other than being a banker – other than being a lender and being asked to provide loans – we also provide and facilitate important forums like this one to really come up with solutions and I think we are quite aware that in an hour-and-a-half or two hours, you are not going to come up with miraculous answers that will suddenly see our state-owned companies being run efficiently and being effective.

But what it does is when people are calm, when there is no frustration of a lending requirement, when people are sitting together in a room, we are able to come up with different ideas and see beyond the minds of the National Treasury and the shareholder departments in the state-owned companies. We are able to go behind the scenes and understand where some of these things are coming from, where the pressure points are.

TEBOGO TSHWANE: You say that all the problems of SOEs won’t necessarily be solved in a one-hour session, but what is the purpose then or what is the outcome that you expect to come out of these discussions and these solutions that do come out. I mean, a lot of things were mentioned, such as ideas about increasing the transparency on the appointment of SOC directors as well as using the power of the PFMA [Public Finance Management Act] to hold some of these directors who have contributed to the failure of SOEs accountable. So these are all stimulating conversations, but to what end?

BAKANG LETSHWITI: What I want to use as an example is a point that actually came out of the session last week. Somebody asked the question about the relevance of some sections of the PFMA in its current form, which is something that you would never discuss if there is a meeting involving an SOC, banks, investors and National Treasury and we are discussing a funding requirement. At that point there is no one really who says let’s look at whether the PFMA is still relevant; let’s look at whether there is something we can take out of the Singapore Temasek Holdings case study. So this is really a forum where we are all sitting, we are calm, we are sober-minded and we are able to ask questions that we would ordinarily not be in a position to, to ask or even have time to debate. So we know that the answers and much of the work that will lead to our state-owned companies seeing any traction happens outside of the forum. The forum is really just to provide the platform to get as many ideas as possible and to get people to cross the line. In a country like ours, South Africa, our democracy was actually the brainchild and born out of dialogue. People were sitting in a room, there was Codesa [Convention for a Democratic South Africa].

Throughout the history of mankind, there is a realisation that at the end of the day we need to sit and talk.

And we might not be able to get a response or to get a solution after the first discussion or even after the fourth discussion, but we cannot stop talking. And on Friday we realised and we noted some of the points that have never come out. I said to you, this is the eighth year that Absa has held this post-budget speech forum. But there were so many fresh ideas that came out of last week’s session that we’ve never had before.

We had on the panel a representative from the presidency, Matsietsi Mokholo, who pointed out that there is a need for government to understand what it is that the South African government wants to achieve from our state-owned entities and she alluded to the fact that some of these enterprises from the very first time when they were started there was a particular mandate, there was a particular strategic and a reason why they were set up. And we need to go back to the basics and understand [that] some SOCs are put into place to perform, to be policy implementers and through that comes infrastructure development. And so we need to go back and understand if we have an ‘Entity A’, what is the primary reason we have this entity?

And when you understand that mandate and the strategy, you are able to put together a funding plan that is relevant and that is fit for purpose. So that discussion is one that we have never had, certainly not in a conversation that I have been involved in, and we are not leaving it there. We actually are taking it out of the forum and we are forming workstreams and we are continuing discussions with all the various stakeholders that were in the room on Friday.

TEBOGO TSHWANE: Speaking on the work that you’ve currently done with SOEs, can you just explain to us what work Absa has done in terms of partnering with SOEs and ensuring that they fulfil their mandates?

BAKANG LETSHWITI: Absa continues to be at the forefront of all the discussions that involve the key state-owned entities. When there is a discussion involving Eskom, whether it’s from a lending perspective or from an advisory perspective at the shareholder level, at the SOC level we are taking part, we are playing an active role. We are not there just to lend and provide balance sheets, the division in Absa that was hosting and put together this forum is not just the state-owned companies portfolio. This was a public-sector-hosted forum. The public sector team in Absa comprises a team that looks after state-owned companies. There is a team that looks after the national department, there is a team that looks after the metropolitan municipalities, and we also have our colleagues in the other part of the bank that looks after the local municipalities and other state-owned entities. We heard when the deputy minister of finance mentioned on Friday that there are more than 700 state entities.

So we are involved in all of these spheres. We also, in our portfolio, bank and have good direct relationships with the DFIs [development finance institutions] – the likes of DBSA [Development Bank of Southern Africa], IDC [Industrial Development Corporation] and the Land Bank – and on a frequent basis we meet with these entities to discuss how as the financial services sector we can play an active role. There are instances where in a transaction there is a level of risk that a commercial bank cannot take; however, a DFI can step in and take that risk. There is also a division within Absa that provides advisory services and on a continuous basis we go and we pitch ideas and so we play a role. We find comprehensive opportunities to partner with the government and with the state-owned entities, apart from lending.

TEBOGO TSHWANE: Thank you Bakang. She is the coverage sector head for state-owned companies at Absa Corporate and Investment Banking.

Brought to you by Absa CIB. 

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